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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
MARK ONE:
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-10794
STERLING WEST BANCORP
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3712404
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3287 WILSHIRE BOULEVARD, LOS ANGELES, CALIFORNIA 90010
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (213) 384-4444
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 15, 1998, the aggregate market value of the common stock held
by non-affiliates of the Registrant was approximately $7,324,761.
Number of shares of common stock of the Registrant outstanding as of
March 15, 1998: 1,712,419.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement For Annual Meeting of Part III of Form 10-K
Shareholders which will be filed within 120 days
of the fiscal year ended December 31, 1997.
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TABLE OF CONTENTS
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Page
PART I
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 4. Submission of Matters to A Vote of Securities Holders. . . . . . . . . . . . . . . . . . . . 17
Item 4. (A) Executive Officers of Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 7.A Disclosure of Market Risk Sensitive Instruments. . . . . . . . . . . . . . . . . . . . . . . 43
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . . . . . . . . . . . . . . . 43
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . 43
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . 43
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . 43
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K. . . . . . . . . . . . . 44
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PART 1
Discussions of certain matters contained in this Annual Report on
Form 10-K may constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 (the "Reform Act") and as such,
may involve risks and uncertainties. These forward-looking statements relate to,
among other things, expectations of the business environment in which the
Company operates, projections of future performance, perceived opportunities in
the market and statements regarding the Company's mission and vision. The
Company's actual results, performance or achievements may differ significantly
from the results, performance, or achievements expressed or implied in such
forward-looking statements. For discussion of the factors that might cause such
a difference, see "Item 1. Business -- Factors That May Affect Future Results".
ITEM 1. BUSINESS.
Sterling West Bancorp
Sterling West Bancorp (the "Company") is a bank holding company
organized as a California corporation on January 21, 1982 under the name of
Sterling Bancorporation. In May 1992, the Company changed its name to Sterling
West Bancorp. As a bank holding company, the Company is subject to the Bank
Holding Company Act of 1956, as amended (the "BHC Act"). The Company commenced
business on December 15, 1982 when, pursuant to a reorganization, it acquired
all of the voting stock of Sterling Bank (the "Bank"). On September 15, 1983,
Sterling Business Credit, Inc., a commercial finance corporation, was formed as
a wholly-owned subsidiary of the Company ("Business Credit"). "See Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Sale of Business Credit Assets". On November 11, 1983, BSC
Mortgage Corporation ("BSC"), a mortgage banking subsidiary, commenced
operations as a wholly-owned subsidiary of the Bank. During the fourth quarter
of 1994 the Company discontinued the mortgage banking operations of BSC. "See
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS -- Discontinued Operations and Note 5 to Consolidated Financial
Statements."
The Company's principal business is to serve as a holding company
for the Bank and for other banking or finance-related subsidiaries which the
Company may establish or acquire. Legal and contractual limitations are imposed
on the amount of dividends that may be paid by the Bank to the Company. See
"ITEM 1. BUSINESS -- Supervision and Regulation -- Restrictions on Transfers of
Funds to the Company by the Bank and Business Credit" and "ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA -- Note 13 to Consolidated Financial
Statements."
At December 31, 1997, the Company had total consolidated assets
of approximately $101.3 million, total consolidated net loans of approximately
$64.8 million, total consolidated deposits of approximately $94.1 million and
total consolidated stockholders' equity of $6.4 million. The discussion and
analysis for the year ended December 31, 1997 primarily reflect the operations
of the Bank. The financial results for the years ended December 31, 1996 and
1995 include results of operations from the formerly active subsidiary, Sterling
Business Credit, Inc., as well as the mortgage banking operations of BSC, which
have since been discontinued. Business Credit and BSC made no material
contribution to the financial results for the year ended December 31, 1997.
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Subsequent Events:
On December 30, 1997, the Company, the Bank and The Pacific Bank, a
national association ("Pacific"), entered into a definitive Agreement and Plan
of Reorganization (the "Reorganization Agreement"). The Reorganization Agreement
provides for, among other things, the merger of a subsidiary corporation to be
organized by Pacific with and into the Company, immediately followed by the
merger of the Company with and into the Bank, immediately followed by the merger
of the Bank with and into Pacific (collectively, the "Merger"). The Merger is
subject to, among other customary conditions to closing, the receipt of
regulatory approvals and the approval of the shareholders of the Company and the
shareholders of Pacific. The Company has scheduled a shareholders' meeting to
consider the Merger on May 27, 1998.
Under the terms of the Reorganization Agreement, the Company's
shareholders will receive aggregate consideration for their shares of the
Company equal to one hundred seventy-five percent (175%) of the consolidated
book value of the Company, as determined in accordance with generally accepted
accounting principles, within three calendar days preceding the proposed
effective date of the Merger. Such amount is subject to certain adjustments set
forth in the definitive Reorganization Agreement.
The foregoing description of the terms of the Reorganization
Agreement does not purport to be a complete statement of the parties' rights and
obligations thereunder, and is qualified in its entirety by reference to the
definitive Reorganization Agreement, a copy of which is contained in the
Company's Report on Form 8-K filed on January 23, 1998.
Sterling Bank
General
The Bank was incorporated under the laws of the State of
California on March 3, 1980, was licensed by the predecessor regulator to the
California Department of Financial Institutions and commenced operations as a
California state-chartered bank on November 5, 1980. The Bank employs a regional
banking concept whereby each regional banking office serves several communities.
The Bank currently maintains a Wilshire Center Office located at 3287 Wilshire
Boulevard, Los Angeles, California ("Wilshire Center Office") and regional
branch offices located at 16661 Ventura Boulevard, Suite 110, Encino, California
("West Valley Regional Office"), 372 East Olive Avenue, Burbank, California
("Mid-Valley Branch Office"), 550 North Brand Boulevard, Glendale, California
("East Valley Regional Office"), and 433 North Camden Drive, Suite 1050, Beverly
Hills, California ("Beverly Hills Regional Office"). See "ITEM 1. BUSINESS --
Supervision and Regulation -- The Bank".
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Banking Services
The Bank provides a wide range of commercial banking services
primarily for professionals and small and medium-sized businesses. Deposit
services include those traditionally offered by commercial banks, such as
checking accounts, savings accounts, interest-bearing negotiable orders of
withdrawal ("NOW") accounts, money market deposit accounts, and time
certificates of deposit. The Bank engages in a variety of lending activities,
including commercial, asset-based, real estate-construction and development,
real estate-collateralized and mortgage, personal, Small Business Administration
("SBA"), home improvement, and other installment and term loans. The Bank offers
a wide range of traditional services designed to attract and serve the needs of
its customers, such as travelers' checks, safe deposit boxes at the Wilshire
Regional Office, collection services and telephone transfers. All of the
above-mentioned services are offered to the Bank's clients on a personalized
basis, except at the Mid-Valley Branch Office which is a drive-up facility. Each
Bank client is assigned to one "Sterling Banker" who is primarily responsible
for serving the client's banking needs. The Bank does not presently operate nor
does it intend in the near future to operate a trust department. The Bank makes
arrangements with correspondent institutions to provide international banking
services.
BSC
BSC, a wholly-owned mortgage banking subsidiary of the Bank, was
engaged in the business of originating, acquiring, processing, selling in the
secondary market and servicing of first and second trust deed loans secured by
residential properties. During the fourth quarter of 1994 the Company
discontinued its mortgage banking operations, substantially all of which were
performed by BSC. By December 31, 1994 the Company had ceased solicitation of
new applications, had funded the mortgages in its pipeline and had completed the
sale of substantially all of its residential mortgage servicing portfolio. BSC's
servicing activities required it to perform certain administrative duties
relating to the loans it originated or acquired and sold under agreements that
provided for payment to BSC of a servicing fee. The servicing fee was generally
based on the outstanding principal balance of the loans. Servicing includes,
among other duties, collecting monthly payments from the borrower, maintaining
escrow accounts and making payments of real estate taxes and insurance premiums.
BSC was licensed by the California Department of Real Estate. During 1995, the
Company settled a dispute over repurchase liability relating to mortgage loans
originated by BSC. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Discontinued Operations, and
Note 5 to the Consolidated Financial Statements".
Business Credit
Sterling Business Credit was formed as a wholly-owned subsidiary
of the Company on September 15, 1983 and commenced operations on June 27, 1984.
Business Credit operated as a commercial finance company, financing accounts
receivables, inventory and equipment. On September 7, 1995, Business Credit sold
approximately $15.2 million of loans to First Capital Corporation. Business
Credit made no material contribution to the results of operations for the year
ended December 31, 1997. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Sale of Business Credit
Assets."
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Competition
The banking and financial services industry in California generally,
and in the Bank's market areas specifically, is highly competitive. The
increasingly competitive environment is a result primarily of changes in
regulation, changes in technology and product delivery systems, and the
accelerating pace of consolidation among financial services providers. The Bank
competes for loans, deposits and customers with other commercial banks, savings
and loan associations, securities and brokerage companies, mortgage companies,
insurance companies, finance companies, money market funds, credit unions, and
other nonbank financial service providers. Many of these competitors are much
larger in total assets and capitalization, have greater access to capital
markets and offer a broader range of financial services than the Bank. In order
to compete with the other financial services providers, the Bank principally
relies upon local promotional activities, personal relationships established by
officers, directors, and employees with its customers, and specialized services
tailored to meet the needs of its customers. In those instances where the Bank
is unable to accommodate a customer's needs, the Bank may arrange for those
services to be provided by its correspondents. The Bank has five offices located
in the Greater Los Angeles area.
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Economic Conditions, Government Policies, Legislation, and Regulation
The Company's profitability, like most financial institutions, is
dependent primarily on interest rate differentials. In general, the difference
between the interest rates paid by the Bank on interest-bearing liabilities,
such as deposits and other borrowings, and the interest rates received by the
Bank on its interest-earning assets, such as loans extended to its customers and
securities held in its investment portfolio, comprises the major portion of the
Company's earnings. These rates are highly sensitive to many factors that are
beyond the control of the Company, such as inflation, recession and
unemployment, and the impact which future changes in domestic and foreign
economic conditions might have on the Company cannot be predicted.
The business of the Company is also influenced by the monetary and
fiscal policies of the federal government and the policies of regulatory
agencies, particularly the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"). The Federal Reserve Board implements national monetary
policies (with objectives such as curbing inflation and combating recession)
through its open-market operations in U.S. Government securities by adjusting
the required level of reserves for depository institutions subject to its
reserve requirements and by varying the target federal funds and discount rates
applicable to borrowings by depository institutions. The actions of the Federal
Reserve Board in these areas influence the growth of bank loans, investments and
deposits and also affect interest rates earned on interest-earning assets and
paid on interest-bearing liabilities. The nature and impact on the Company and
the Bank of any future changes in monetary and fiscal policies cannot be
predicted.
From time to time, legislative acts, as well as regulations, are
enacted which have the effect of increasing the cost of doing business, limiting
or expanding permissible activities, or affecting the competitive balance
between banks and other financial services providers. Proposals to change the
laws and regulations governing the operations and taxation of banks, bank
holding companies and other financial institutions are frequently made in the
U.S. Congress, in the state legislatures and before various bank regulatory
agencies. See "ITEM 1. BUSINESS - Supervision and Regulation."
Supervision and Regulation
General
Bank holding companies and banks are extensively regulated under
both federal and state law. These regulations are intended primarily for the
protection of depositors and the deposit insurance fund and not for the benefit
of stockholders of the Company. Set forth below is a summary description of
certain laws and regulations which relate to the operations of the Company and
the Bank. The description does not purport to be complete and is qualified in
its entirety by reference to the applicable laws and regulations.
In recent years, significant legislative proposals and reforms
affecting the financial services industry have been discussed and evaluated by
Congress. Such proposals include legislation to revise the Glass-Steagall Act
and the Bank Holding Company Act of 1956, as amended (the "BHCA"), and to expand
permissible activities for banks, principally to facilitate the convergence of
commercial and investment banking. Certain proposals also sought to expand
insurance activities of banks. It is unclear whether any of these proposals, or
any form of them, will be introduced in the current Congress and become law.
Consequently, it is not possible to determine what effect, if any, they may have
on the Company and the Bank.
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The Company
The Company, as a registered bank holding company, is subject to
regulation under the BHCA. The Company is required to file with the Federal
Reserve Board periodic reports and such additional information as the Federal
Reserve Board may require pursuant to the BHCA. The Federal Reserve Board may
conduct examinations of the Company and its subsidiaries.
The Federal Reserve Board may require that the Company terminate an
activity or terminate control of or liquidate or divest certain subsidiaries or
affiliates when the Federal Reserve Board believes the activity or the control
of the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The Federal
Reserve Board also has the authority to regulate provisions of certain bank
holding company debt, including authority to impose interest ceilings and
reserve requirements on such debt. Under certain circumstances, the Company must
file written notice and obtain approval from the Federal Reserve Board prior to
purchasing or redeeming its equity securities.
Under the BHCA and regulations adopted by the Federal Reserve Board,
a bank holding company and its nonbanking subsidiaries are prohibited from
requiring certain tie-in arrangements in connection with any extension of
credit, lease or sale of property or furnishing of services. Further, the
Company is required by the Federal Reserve Board to maintain certain levels of
capital. See --Capital Standards.
The Company is required to obtain the prior approval of the Federal
Reserve Board for the acquisition of more than 5% of the outstanding shares of
any class of voting securities or substantially all of the assets of any bank or
bank holding company. Prior approval of the Federal Reserve Board is also
required for the merger or consolidation of the Company and another bank holding
company.
The Company is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
more than 5% of the outstanding voting shares of any company that is not a bank
or bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks or furnishing
services to its subsidiaries. However, the Company, subject to the prior
approval of the Federal Reserve Board, may engage in any, or acquire shares of
companies engaged in, activities that are deemed by the Federal Reserve Board to
be so closely related to banking or managing or controlling banks as to be a
proper incident thereto.
In addition, the Federal Reserve Board is empowered to enter into a
memorandum of understanding with a bank holding company requiring specific
corrective actions. As a result of its examination of the Company in April 1995,
the Federal Reserve Bank of San Francisco proposed that the Board of Directors
of the Company enter into a memorandum of understanding. In November 1995, the
Federal Reserve Bank and the Board of Directors of the Company entered into a
memorandum of understanding (the "FRB Memorandum"). Under the FRB Memorandum,
the Company is required, among other things, to comply with the Joint
Memorandum (as defined below) (see "ITEM 1. BUSINESS -- Supervision and
Regulation -- The Bank"); to ensure that the Company has sufficient cash to pay
its expenses and to service its debt; the Company may not, directly or
indirectly, acquire or sell any interest in any entity, line of business,
problem loans or other assets, without the prior written approval of the Federal
Reserve Bank; and to not pay cash dividends without the prior written consent of
the Federal Reserve Bank.
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It was determined subsequent to December 31, 1997 that the Company
was not in compliance with the FRB Memorandum at December 31, 1997, due to the
Bank's non-compliance with the Tier 1 capital ratio of 6.75% required under the
terms of the Joint Memorandum. The Bank's Tier 1 capital ratio was 6.42% at
December 31, 1997. The decline in the Bank's capital ratio was the result of a
write down of a deferred tax asset. See "ITEM 1. BUSINESS - Supervision and
Regulation - The Bank". The Company and the Bank's failure to comply with the
terms of the FRB Memorandum or Joint Memorandum could result in further
regulatory action by the Federal Reserve Bank, the Federal Deposit Insurance
Corporation and the California Department of Financial Institutions. See
"--Capital Standards."
Under Federal Reserve Board regulations, a bank holding company is
required to serve as a source of financial and managerial strength to its
subsidiary banks and may not conduct its operations in an unsafe or unsound
manner. In addition, it is the Federal Reserve Board's policy that in serving as
a source of strength to its subsidiary banks, a bank holding company should
stand ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. A bank holding
company's failure to meet its obligations to serve as a source of strength to
its subsidiary banks will generally be considered by the Federal Reserve Board
to be an unsafe and unsound banking practice or a violation of the Federal
Reserve Board's regulations or both.
The Company is also a bank holding company within the meaning of
Section 3700 of the California Financial Code. As such, the Company and its
subsidiaries are subject to examination by, and may be required to file reports
with, the California Department of Financial Institutions (the "DFI").
The Company's securities are registered with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). As such, the Company is subject to the information, proxy
solicitation, insider trading, and other requirements and restrictions of the
Exchange Act.
The Bank
The Bank, as a California chartered bank, is subject to primary
supervision, periodic examination, and regulation by the DFI and the Federal
Deposit Insurance Corporation (the "FDIC"). To a lesser extent, the Bank is also
subject to certain regulations promulgated by the Federal Reserve Board. If, as
a result of an examination of the Bank, the FDIC should determine that the
financial condition, capital resources, asset quality, earnings prospects,
management, liquidity, or other aspects of the Bank's operations are
unsatisfactory or that the bank or its management is violating or has violated
any law or regulation, various remedies are available to the FDIC. Such remedies
include the power to enjoin unsafe or unsound practices, to require affirmative
action to correct any conditions resulting from any violation or practice, to
issue an administrative order that can be judicially enforced, to direct an
increase in capital, to restrict the growth of the Bank, to assess civil
monetary penalties, to remove officers and directors and ultimately to terminate
the Bank's deposit insurance, which for a California chartered bank would result
in a revocation of the Bank's charter. The DFI has many of the same remedial
powers.
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Additionally, the FDIC and the DFI are empowered to enter into a
memorandum of understanding with a bank requiring specific corrective actions.
As a result of joint examinations of the Bank in 1997, the FDIC and the DFI
proposed that the Board of Directors of the Bank enter into a memorandum of
understanding which would replace and supersede the provisions of any prior
memorandums of understanding. In November 1997, the FDIC, the DFI and the Board
of Directors of the Bank entered into a joint memorandum of understanding (the
"Joint Memorandum"). Under the Joint Memorandum, the Bank is required, among
other things, to achieve and maintain Tier 1 capital equal to or above 6.75% of
total assets; the Bank shall have and retain qualified management; establish and
maintain an adequate allowance for loan losses; and not pay cash dividends
without the prior written consent of both the FDIC and the DFI.
At December 31, 1997 the Bank had a Tier 1 capital ratio of 6.42%
and therefore was not in compliance with the capital ratio of 6.75% required
under the terms of the Joint Memorandum. It was determined subsequent to
December 31, 1997 that approximately $412,000 of an operating loss carryback
claim would be disallowed for federal income tax purposes, resulting in
additional income tax provision for the year ended December 31, 1997. See Note 9
to Consolidated Financial Statements. Management believes that compliance with
the capital requirement will be met by March 31, 1998 through a combination of
earnings and a reduction in average assets. However, the failure to comply with
the terms of the Joint Memorandum could result in additional regulatory action.
See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Capital Resources", Note 11 to the Financial
Statements, and "-- Capital Standards."
Various requirements and restrictions under the laws of the State of
California and the United States affect the operations of the Bank. State and
federal statutes and regulations relate to many aspects of the Bank's
operations, including reserves against deposits, ownership of deposit accounts,
interest rates payable on deposits, loans, investments, mergers and
acquisitions, borrowings, dividends, locations of branch offices, and capital
requirements. Further, the Bank is required to maintain certain levels of
capital. See -- "Capital Standards".
Dividends and Other Transfers of Funds
The Company is a legal entity separate and distinct from the Bank.
The Bank is subject to various statutory and regulatory restrictions on its
ability to pay dividends to the Company. At present, substantially all of the
Company's revenues, including funds available for the payment of dividends and
other operating expenses, are, and will continue to be, primarily dividends and
certain management and service fees paid by the Bank. However, at December 31,
1997, the Bank, as a result of losses, had no retained earnings legally
available for the payment of cash dividends. Under the terms of the Joint
Memorandum, the Bank is prohibited from paying cash dividends to the Company
unless the payment is approved in advance by the Regional Director of the FDIC
and the DFI. In addition, the California Department of Financial
Institutions and the Federal Reserve Board generally have the authority to
prohibit the Bank from paying dividends, depending upon the Bank's financial
condition, if such payment is deemed to constitute an unsafe or unsound
practice.
The FDIC and the DFI also have authority to prohibit the
Bank from engaging in activities that, in their opinion, constitute unsafe or
unsound practices in conducting its business. It is possible, depending upon the
financial condition of the bank in question and other factors, that the FDIC and
the DFI could assert that the payment of dividends or other payments
might, under some circumstances, be such an unsafe or unsound practice. Further,
the FDIC and the Federal Reserve Board have established guidelines with respect
to the maintenance of appropriate levels of capital by banks or bank holding
companies under their jurisdiction. Compliance with the standards set forth in
such guidelines and the restrictions that are or may be imposed under the prompt
corrective action provisions of federal law could limit the amount of dividends
which the Bank or the Company may pay. An insured depository institution
prohibited from paying management fees to any controlling persons or, with
certain limited exceptions, making capital distributions if after such
transaction the institution would be
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undercapitalized. See "-- Prompt Corrective Regulatory Action and Other
Enforcement Mechanisms" and "-- Capital Standards" for a discussion of these
additional restrictions on capital distributions."
The Bank is subject to certain restrictions imposed by state and
federal law on any extensions of credit to, or the issuance of a guarantee or
letter of credit on behalf of, the Company or other affiliates, the purchase of,
or investments in, stock or other securities of its affiliates, the taking of
such securities as collateral for loans, and the purchase of assets of the
Company or other affiliates. Such restrictions prevent the Company and such
other affiliates from borrowing from the Bank unless the loans are secured by
collateral having a market value equal to the amount required by law. Further,
the appropriate amount of covered transactions of the Bank with any affiliate is
limited, individually, to 10.0% of the Bank's capital and surplus (as defined by
federal regulation), and such secured loans and investments are limited, in the
aggregate, as to all affiliates, to 20.0% of the Bank's capital and surplus (as
defined by federal regulation). California law also imposes certain restrictions
with respect to transactions involving the Company and other controlling persons
of the Bank. Additional restrictions on transactions with affiliates may be
imposed on the Bank under the prompt corrective action provisions of federal
law. See "-- Supervision and Regulation - Prompt Corrective Action and Other
Enforcement Mechanisms."
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Capital Standards
The Federal Reserve Board and the FDIC have adopted risk-based
minimum capital guidelines intended to provide a measure of capital that
reflects the degree of risk associated with a banking organization's operations
for both transactions reported on the balance sheet as assets and transactions,
such as letters of credit and recourse arrangements, which are recorded as off
balance sheet items. Under these guidelines, nominal dollar amounts of assets
and credit equivalent amounts of off balance sheet items are multiplied by one
of several risk adjustment percentages, which range from 0% for assets with low
credit risk, such as certain U.S. Treasury securities, to 100% for assets with
relatively high credit risk, such as commercial loans.
The federal banking agencies require a minimum ratio of qualifying
total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1
capital to risk-adjusted assets of 4%. In addition to the risk-based guidelines,
federal banking regulators require banking organizations to maintain a minimum
amount of Tier 1 capital to total assets, referred to as the leverage ratio. For
a banking organization rated in the highest of the five categories used by
regulators to rate banking organizations, the minimum leverage ratio of Tier 1
capital to total assets must be 3%. In addition to these uniform risk-based
capital guidelines and leverage ratios that apply across the industry, the
regulators have the discretion to set individual minimum capital requirements
for specific institutions at rates significantly above the minimum guidelines
and ratios. In the case of the Bank, as a result of entering into the Joint
Memorandum, the Bank is required, among other things, to achieve and maintain
Tier 1 capital equal to or above 6.75% of total assets. Additionally, pursuant
to the FRB Memorandum, the Company is required to maintain the Bank's Tier 1
capital at such level.
At December 31, 1997, the Bank had a Tier 1 capital ratio of 6.42%
and was therefore not in compliance with the 6.75% capital requirement of the
Joint Memorandum and FRB Memorandum. However, the Bank expects to be in
compliance with this requirement as of March 31, 1998. Failure to comply with
the terms of the Joint Memorandum, the FRB Memorandum, or other capital
requirements imposed by the Company's or the Bank's federal or state regulators
could result in further action by the Federal Reserve Bank, the FDIC or the DFI.
Enforcement actions may include the imposition of a conservator or receiver, the
issuance of a cease and desist order that can be judicially enforced, the
termination of insurance of deposits, the imposition of civil money penalties,
the issuance of directives to increase capital, the issuance of formal and
informal agreements, the issuance of removal and prohibition orders against
institution-affiliated parties and the enforcement of such actions through
injunctions or restraining orders.
For discussion of the Company's and the Bank's capital positions,
see "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- Capital Resources" and Note 11 of notes to Consolidated
Financial Statements.
Prompt Corrective Action and Other Enforcement Mechanisms
Federal banking agencies possess broad powers to take corrective and
other supervisory action to resolve the problems of insured depository
institutions, including but not limited to those institutions that fall below
one or more prescribed minimum capital ratios. Each federal banking agency has
promulgated regulations defining the following five categories in which an
insured depository institution will be placed, based on its capital ratios: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized.
An institution that, based upon its capital levels, is classified as
well capitalized, adequately capitalized, or undercapitalized may be treated as
though it were in the next lower capital category if the appropriate federal
banking agency, after notice and opportunity for hearing, determines that an
unsafe or unsound condition or an unsafe or unsound practice warrants such
treatment. At each successive lower capital category, an insured depository
institution is subject to more restrictions. The federal banking agencies,
however, may not treat a significantly undercapitalized institution as
critically undercapitalized unless its capital ratio actually warrants such
treatment.
12
<PAGE> 13
A bank may fall into the critically undercapitalized category if its
tangible equity does not exceed 2% of the bank's total assets. Federal
guidelines generally define tangible equity as a bank's tangible assets less
liabilities. Federal regulators may, among other alternatives, require the
appointment of a conservator or a receiver for a critically undercapitalized
bank. In California, the DFI may require the appointment of a
conservator or receiver for a state-chartered bank if its tangible equity does
not exceed 3% of the bank's total assets or $1 million.
In addition to measures taken under the prompt corrective action
provisions, commercial banking organizations may be subject to potential
enforcement actions by the federal regulators for unsafe or unsound practices in
conducting their businesses or for violations of any law, rule, regulation, or
any condition imposed in writing by the agency or any written agreement with the
agency.
Safety and Soundness Standards
The federal banking agencies have adopted guidelines designed to
assist the federal banking agencies in identifying and addressing potential
safety and soundness concerns before capital becomes impaired. The guidelines
set forth operational and managerial standards relating to: (i) internal
controls, information systems and internal audit systems, (ii) loan
documentation, (iii) credit underwriting, (iv) asset growth, (v) earnings, and
(vi) compensation, fees and benefits. In addition, the federal banking agencies
have also adopted safety and soundness guidelines with respect to asset quality
and earnings standards. These guidelines provide six standards for establishing
and maintaining a system to identify problem assets and prevent those assets
from deteriorating. Under these standards, an insured depository institution
should: (i) conduct periodic asset quality reviews to identify problem assets,
(ii) estimate the inherent losses in problem assets and establish reserves that
are sufficient to absorb estimated losses, (iii) compare problem asset totals to
capital, (iv) take appropriate corrective action to resolve problem assets, (v)
consider the size and potential risks of material asset concentrations, and (vi)
provide periodic asset quality reports with adequate information for management
and the board of directors to assess the level of asset risk. These new
guidelines also set forth standards for evaluating and monitoring earnings and
for ensuring that earnings are sufficient for the maintenance of adequate
capital and reserves.
Premiums for Deposit Insurance
The Bank's deposit accounts are insured by the Bank Insurance Fund
("BIF"), as administered by the FDIC, up to the maximum permitted by law.
Insurance of deposits may be terminated by the FDIC upon a finding that the
institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations, or has violated any applicable law,
regulation, rule, order, or condition imposed by the FDIC or the institution's
primary regulator.
13
<PAGE> 14
The FDIC charges an annual assessment for the insurance of deposits,
which as of December 31, 1997 ranged from 0 to 27 basis points per $100 of
insured deposits, based on the risk a particular institution poses to its
deposit insurance fund. The risk classification is based on an institution's
capital group and supervisory subgroup assignment. During 1997, the Bank's
annual assessment rate was 3 cents per $100 of deposits, and at January 1, 1998
was 17 cents per $100 of deposits. Pursuant to the Economic Growth and Paperwork
Reduction Act of 1996 ("the Act"), at January 1, 1997, the Bank began paying, in
addition to its normal deposit insurance premium as a member of the BIF, an
amount equal to approximately 1.3 basis points per $100 of insured deposits
toward the retirement of the Financing Corporation bonds ("Fico Bonds") issued
in the 1980s to assist in the recovery of the savings and loan industry. Members
of the Savings Association Insurance Fund ("SAIF"), by contrast, pay, in
addition to their normal deposit insurance premium, approximately 6.4 basis
points. Under the Act, the FDIC is not permitted to establish SAIF assessment
rates that are lower than comparable BIF assessment rates. Beginning no later
than January 1, 2000, the rate paid to retire the Fico Bonds will be equal for
members of the BIF and the SAIF. The Act also provides for the merging of the
BIF and the SAIF by January 1, 1999 provided there are no financial institutions
still chartered as savings associations at that time. Should the insurance funds
be merged before January 1, 2000, the rate paid by all members of this new fund
to retire the Fico Bonds would be equal.
Interstate Banking and Branching
The BHCA currently permits bank holding companies from any state to
acquire banks and bank holding companies located in any other state, subject to
certain conditions, including certain nationwide- and state-imposed
concentration limits. The Bank has the ability, subject to certain restrictions,
to acquire by acquisition or merger branches outside its home state. The
establishment of new interstate branches is also possible in those states with
laws that expressly permit it. Interstate branches are subject to certain laws
of the states in which they are located. Competition may increase further as
banks branch across state lines and enter new markets.
Community Reinvestment Act and Fair Lending Developments
The Bank is subject to certain fair lending requirements and
reporting obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of its local communities, including low- and moderate-income
neighborhoods. A bank may be subject to substantial penalties and corrective
measures for a violation of certain fair lending laws. The federal banking
agencies may take compliance with such laws and CRA obligations into account
when regulating and supervising other activities.
A bank's compliance with its CRA obligations is based on a
performance-based evaluation system which bases CRA ratings on an institution's
lending service and investment performance. When a bank holding company applies
for approval to acquire a bank or other bank holding company, the Federal
Reserve Board will review the assessment of each subsidiary bank of the
applicant bank holding company, and such records may be the basis for denying
the application. Based on an examination conducted during 1996, the Bank was
rated Satisfactory in complying with its CRA obligations.
14
<PAGE> 15
Year 2000 Compliance
In May 1997, the Federal Financial Institutions Examination Council
issued an interagency statement to the chief executive officers of all federally
supervised financial institutions regarding Year 2000 project management
awareness. It is expected that unless financial institutions address the
technology issues relating to the coming of the year 2000, there will be major
disruptions in the operations of financial institutions. The statement provides
guidance to financial institutions, providers of data services, and all
examining personnel of the federal banking agencies regarding the year 2000
problem. The federal banking agencies intend to conduct year 2000 compliance
examinations, and the failure to implement a year 2000 program may be seen by
the federal banking agencies as an unsafe and unsound banking practice. In
addition, federal banking agencies will be taking into account year 2000
compliance programs when analyzing applications and may deny an application
based on year 2000 related issues.
The Company's critical automated systems have been identified, and
related priorities have been set for Year 2000 compliance. The Company currently
estimates that its Year 2000 project cost should not exceed $100,000. These
costs include estimates for consulting, hardware, software and other expenses
related to infrastructure necessary to prepare the systems for the year 2000.
The Company's management expects that all the systems and operations will be
Year 2000 compliant by the fourth quarter of 1998.
Recent Accounting Pronouncements
In August 1997, the FASB issued SFAS No. 128, Earnings Per Share.
This statement replaces the presentation of primary earnings per share with a
presentation of basic earnings per share. The statement also requires dual
presentation of basic and diluted earnings per share by entities with complex
capital structures and requires a reconciliation of the numerators and
denominators between the two calculations. SFAS No. 128 was adopted by the
Company for the year ended December 31, 1997. The adoption of the Statement had
no impact on the earnings per share since the stock options of the Company were
not dilutive.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. This Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. This statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This statement
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. SFAS
No. 130 is effective for the Company January 1, 1998 and will require the
separate reporting of comprehensive income.
Employees
At December 31, 1997, the Company, and the Bank, employed 55 individuals. The
Company believes that its employee relations are excellent.
Factors That May Affect Future Results
The following is a discussion of certain factors which may affect the Company's
financial results and operations, and should be considered in evaluating the
Company.
15
<PAGE> 16
Economic Conditions and Geographic Concentration. The Company's operations are
concentrated in Southern California. The results of the Company depend largely
upon economic conditions in this area, which have been relatively volatile over
the last several years. While the Southern California economy recently has
exhibited positive economic and employment trends, there is no assurance that
such trends will continue. A deterioration in economic conditions could have
material adverse impact on the quality of the Company's loan portfolio and the
demand for its products and services.
Interest Rates. The Company anticipates that interest rate levels will remain
generally stable in the near future, but if interest rates vary substantially
from present levels, the Company's results may differ materially from the
results currently anticipated. Changes in interest rates will influence the
growth of loans, investments and deposits and affect the rates received on loans
and investment securities and those paid on deposits.
Government Regulation and Monetary Policy. The banking industry is subject to
extensive federal and state supervision and regulation. Significant new laws or
changes in, or repeals of , existing laws may cause the Company's results to
differ materially. Further, federal monetary policy, particularly as implemented
through the Federal Reserve System, significantly affects credit conditions for
the Company, primarily through open market operations in United States
government securities, the discount rate for bank borrowings and bank reserve
requirements, and a material change in these conditions would be likely to have
a material impact on the Company's results.
Competition. The banking and financial services business in the Company's market
areas are highly competitive. The increasingly competitive environment is a
result in part of changes in regulation, changes in technology and product
delivery systems, and the accelerating pace of consolidation among financial
services providers. The results of the Company may differ if circumstances
affecting the nature or level of competition change.
Credit Quality. A significant source of risk arises from the possibility that
losses will be sustained because borrowers, guarantors and related parties may
fail to perform in accordance with the terms of their loans. The Company has
adopted underwriting and credit monitoring procedures and credit policies,
including the establishment and review of the allowance for credit losses, that
management believes are appropriate to minimize this risk by assessing the
likelihood of nonperformance, tracking loan performance and diversifying the
Company's credit portfolio. Such policies and procedures, however, may not
prevent unexpected losses that could materially adversely affect the Company's
results.
Other Risks. From time to time, the Company details other risks with respect to
its business and/or financial results in its filings with the Commission.
16
<PAGE> 17
ITEM 2. PROPERTIES.
The head offices of the Company and the Bank are located at the
Wilshire Center Office at 3287 Wilshire Boulevard, Los Angeles, California. The
Bank leases 16,500 square feet of a three-story building under a twenty-five
year lease which expires June 2, 2005. The Company occupies office space within
the premises leased by the Bank. The total lease payment is currently $35,429
per month and the total lease expense was $425,148 for the years 1997 and 1996,
respectively.
Except for the Mid-Valley Branch Office, which is owned by the
Bank, all regional branch properties include options to renew. For the year
ended December 31, 1997, annual rental payments under these leases aggregated
$129,951. The Mid-Valley Branch Office is not subject to any encumbrances.
The Company's total rental expense for the year ended December
31, 1997, exclusive of furniture and equipment expense, was approximately
$597,000. Management believes that its existing facilities are adequate for its
present purposes.
ITEM 3. LEGAL PROCEEDINGS.
The Company, BSC, Bank and Business Credit are involved in
various legal proceedings and litigation in the normal course of their business.
See "ITEM 1. BUSINESS Supervision and Regulation -- The Bank" and "-- The
Company," for a discussion of the Joint Memorandum between the Board of
Directors of the Bank and the FDIC and the DFI; and the FRB Memorandum between
the Board of Directors of the Company and the Federal Reserve Bank. While no
assurance can be given as to the likelihood of an unfavorable outcome of any
such litigation or the estimated amount of potential loss, if any, based upon
currently available information the Company does not believe that the outcome of
any such litigation will have a material adverse effect on the results of
operations or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during
the fourth quarter of 1997.
17
<PAGE> 18
ITEM 4(A). EXECUTIVE OFFICERS OF REGISTRANT.
As of March 15, 1998, the executive officers of the Company
were:
<TABLE>
<CAPTION>
Current Position with
Name Age Company and its Subsidiaries
---- --- ----------------------------
<S> <C> <C>
Joseph C. Carona 56 Chief Financial Officer, Executive Vice
President, Company; President, Sterling Bank
Reginald R. Prout 53 Vice President, Company; Chief Financial Officer
and Cashier, Sterling Bank
Allan E. Dalshaug 66 Chairman of the Board, Chief Executive
Officer and President, Company; Chairman of
the Board and Chief Executive Officer,
Sterling Bank; Chairman of the Board, Chief
Executive Officer, Sterling Business Credit,
Inc.
Donald Mintz 54 Vice President, Company; Chief Financial
Officer, Sterling Business Credit, Inc.;
Vice president, Sterling Bank
</TABLE>
Mr. Carona was President of Columbia National Bank, a national
banking association located in Santa Monica, California, from May 1982 until
joining Sterling Bank as President in August 1989. Mr. Carona became Executive
Vice President of the Company in January 1991.
Mr. Prout was Executive Vice President and Chief Operating
Officer of Columbia National Bank, a national banking association located in
Santa Monica, California, from September 1982 until joining Sterling Bank as
Executive Vice President and Chief Administrative Officer in July 1990. Mr.
Prout became Chief Financial Officer and Cashier of the Bank and Vice President
of the Company in June 1996.
Mr. Dalshaug has served as Chairman of the Board, Chief
Executive Officer and President of the Company since 1982. Mr. Dalshaug also
serves as Chief Executive Officer of the Bank and Business Credit, and, prior to
1989, served in the additional capacity of President of Sterling Bank.
Mr. Mintz was Senior Vice President & Manager of First Charter
Bank located in Los Angeles, CA. from June 1989 until joining Sterling Bank as
Vice President of Asset Based Lending, in June 1996. Mr. Mintz became Vice
President of Sterling Business Credit in July 1996 and Chief Financial Officer
of Sterling Business Credit and Vice President of the Company in September 1996.
18
<PAGE> 19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Since July 1992 the common stock of the Company has traded on
The Nasdaq Stock Market as a National Market Issue under the symbol SWBC. The
number of shareholders of record at March 15, 1998 was approximately 336.
The following table sets forth high and low sales prices for
the Company's common stock for the period from January 1, 1996 to December 31,
1997 as reported by The Nasdaq Stock Market:
<TABLE>
<CAPTION>
Quarter Ended High Low
------------- ---- ---
<S> <C> <C>
March 31, 1996 $4.13 $2.88
June 30, 1996 $3.00 $2.63
September 30, 1996 $3.25 $2.88
December 31, 1996 $3.63 $3.00
March 31, 1997 $4.13 $3.63
June 30, 1997 $4.75 $4.13
September 30, 1997 $5.88 $4.88
December 31, 1997 $6.75 $5.19
</TABLE>
The Company declared no cash dividends in 1996 or 1997. The Board of
Directors suspended the quarterly cash dividends of $0.05 per common share in
the third quarter of 1993 in order to conserve capital. The Company expects that
future dividends will depend on continued profitability and the maintenance of
acceptable financial results in the future. There are restrictions on the
ability of the Company's subsidiaries to transfer funds to the Company in the
form of dividends. See "ITEM 1. BUSINESS -- Supervision and Regulation --
Restrictions on Transfers of Funds to the Company by the Bank and Business
Credit" and "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - Note 13 to
Consolidated Financial Statements."
19
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations
Interest income $ 8,421,000 $ 8,790,000 $ 12,380,000 $ 12,436,000 $ 13,396,000
Interest expense 2,540,000 2,529,000 4,208,000 3,986,000 4,045,000
Net interest income 5,881,000 6,261,000 8,172,000 8,450,000 9,351,000
Provision for loan losses 1,242,000 886,000 1,104,000 266,000 1,025,000
Net income (loss) from
continuing operations (886,000) 343,000 (1,515,000) 29,000 (99,000)
Net income (loss) from
discontinued operations -- -- (1,924,000) (2,904,000) (667,000)
Net income (loss) (1) (886,000) 343,000 (3,439,000) (2,875,000) (366,000)
Per share (2) (3):
Basic income (loss) per
share (1) $ (0.52) $ 0.20 $ (2.01) $ (1.68) $ (0.22)
Diluted income (loss) per
share (1) $ (0.52) $ 0.20 $ (2.01) $ (1.66) $ (0.21)
Cash dividends -- -- -- -- $ 0.10
Return on average assets -0.86% 0.33% -2.75% -2.00% -0.22%
Return on average
stockholders equity -12.60% 4.71% -34.40% -23.81% -2.65%
Consolidated Balance Sheets
Total assets $101,250,000 $104,561,000 $122,419,000 $132,491,000 $153,018,000
Total loans (4) 65,889,000 68,889,000 72,406,000 91,075,000 91,061,000
Allowance for loan losses 1,072,000 1,260,000 1,510,000 1,613,000 1,899,000
Investment securities 10,735,000 7,224,000 7,614,000 6,974,000 7,587,000
Total deposits 94,074,000 96,186,000 112,376,000 107,098,000 122,511,000
Stockholders' equity 6,386,000 7,261,000 6,918,000 10,357,000 13,232,000
Equity to assets ratio 6.31% 7.02% 8.00% 8.40% 8.26%
</TABLE>
- -------------
(1) Net loss for 1993 includes income of $400,000 or $0.23 per share related
to the cumulative effect of a change in accounting for income taxes.
(2) Income (loss) per share from discontinued operations was $(1.12), $(1.70)
and $(0.39) for 1995, 1994 and 1993, respectively.
(3) Adjusted to reflect a 5% stock dividend paid in October 1993.
(4) Gross loans net of undisbursed loan funds and deferred fees and costs.
20
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Certain statements under this caption may constitute "forward-looking
statements" under the Reform Act, which involve risks and uncertainties. The
Company's actual results may differ significantly from the results discussed in
such forward-looking statements. Factors that might cause such a difference
include, but are not limited to, economic conditions, competition in the
geographic and business areas in which the Company conducts its operations,
fluctuations in interest rates, credit quality and government regulation. For
additional information concerning these factors, see "Item 1. Business --
Factors That May Affect Future Results".
Management's Discussion and Analysis of Financial Condition and Results of
Operations is intended to provide a better understanding of the material changes
in trends relating to the financial condition, results of operations, and
liquidity of the Company. The discussion and analysis for the year ended
December 31, 1997 and 1996, primarily reflect the operations of the Bank. The
Results of Operations for the year ended December 31, 1995 include income earned
by the formerly active subsidiary, Business Credit and the discontinued mortgage
banking operations of BSC. During the third quarter of 1995, the Company sold
substantially all of the assets of Sterling Business Credit, Inc. (See "Item 7.
Sale of Business Credit Assets"). In addition, during the fourth quarter of
1994, the Company discontinued its mortgage banking operations, substantially
all of which were performed by BSC. (See "Item 7. Discontinued Operations").
Business Credit and BSC made no material contribution to the results of
operations for the period ending December 31, 1997 and 1996. The Bank and
Business Credit are wholly-owned subsidiaries of the Company. Unless otherwise
specified, the discussion below relates to the Company's consolidated financial
condition and operations.
The Company's results of operations are dependent primarily on net interest
income, which is the difference between the interest income earned on its loan
portfolio, securities and other earning assets, and its cost of funds,
consisting of interest paid on its deposits and borrowings. The Company's
operating results are also impacted by provisions for loan losses, and to a
lesser extent service charges on deposit accounts and other noninterest income.
In addition, the Company's operating expenses principally consist of salaries,
wages and employee benefits, occupancy expenses, real estate operations expense
and other general noninterest expenses. The Company's results of operations are
also significantly affected by general economic and competitive conditions,
particularly changes in interest rates and actions of regulatory authorities.
21
<PAGE> 22
FINANCIAL CONDITION
Distribution of Assets, Liabilities, and Stockholders' Equity
The following table sets forth the Company's consolidated average
balances of each principal category of assets, liabilities and stockholders'
equity and the percentage distribution of these items for each of the past two
fiscal years (dollars in thousands).
<TABLE>
<CAPTION>
1997 1996
---- ----
Average Percent Average Percent
ASSETS: Balance of Total Balance of Total
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Cash and due from banks $ 5,733 5.60% $ 5,531 5.33%
Federal funds sold 14,478 14.15 14,925 14.38
Securities held to maturity 11,256 11.00 7,505 7.23
Loans receivable, net 65,981 64.46 69,703 67.13
Real estate held for sale 2,335 2.28 2,888 2.78
Fixed assets, net 1,118 1.09 1,231 1.18
Other assets 1,452 1.42 2,043 1.97
-------- ------- -------- ------
Total assets $102,353 100.00% $103,826 100.00%
======== ======= ======== ======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Demand $ 27,419 26.79% $ 27,401 26.39%
Savings and NOW accounts 51,290 50.11 52,966 51.02
Money market accounts 6,365 6.22 6,324 6.09
Time deposits 8,509 8.31 7,416 7.14
Notes payable 392 0.38 443 0.43
Other liabilities 1,348 1.32 1,988 1.91
-------- ------- -------- ------
Total liabilities 95,323 93.13 96,538 92.98
Stockholders' equity 7,030 6.87 7,288 7.02
-------- ------- -------- ------
Total liabilities and
stockholders' equity $102,353 100.00% $103,826 100.00%
======== ======= ======== ======
</TABLE>
22
<PAGE> 23
The Company's total average assets decreased to $102.4 million at December 31,
1997 as compared to $103.8 million at December 31, 1996. The Company's ratio of
average earning assets to average assets was 89.6% for 1997 compared to 88.7%
for 1996. The change in total average assets included a 5.3% decrease in loans
receivable offset by a 48.6% increase in Securities held to maturity. Average
loans receivable, net at December 31, 1997, declined primarily as a result of
loan payoffs and maturities during the year, which was not replaced by new loan
production. Securities held to maturity increased as a result of management's
Asset/Liability decisions.
Loan Portfolio
The following table sets forth the amount of loans outstanding and their
respective percentages, as of the dates indicated by major categories (dollars
in thousands).
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ---
Amount Percent Amount Percent
------- ------- ------- -------
<S> <C> <C> <C> <C>
Real estate - construction and
development $ 3,258 5.0% $ 5,930 8.6%
Real estate - mortgage 15,127 22.9 15,234 22.1
Commercial and industrial 44,602 67.7 46,205 67.1
Loans to individuals 2,347 3.6 1,444 2.1
All other loans 555 0.8 76 0.1
------- ----- ------- -----
Total Loans receivable (1) $65,889 100.0% $68,889 100.0%
======= ===== ======= =====
</TABLE>
- --------------------
(1) Net of undisbursed loan funds and deferred fees and costs.
Loans receivable decreased to $65.9 million at December 31, 1997 from
$68.9 million at December 31, 1996. At December 31, 1997, Real
estate-construction and development loans plus Real estate-mortgage loans
accounted for 27.9% of total loans as compared to 30.7% of total loans at
December 31, 1996.
23
<PAGE> 24
Maturities and Sensitivity to Changes in Interest Rates
The following table sets forth the maturity distribution of the Company's
loan portfolio at December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
Maturing
--------
After One After Five After
Within But Within But Within Ten
One Year Five Years Ten Years Years Total
-------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Real estate -
construction
and development $ 2,833 $ 380 $ -- $ 45 $ 3,258
Real estate -
mortgage 2,294 11,482 19 1,332 15,127
Commercial and industrial 20,972 14,856 3,955 4,819 44,602
Loans to individuals 1,726 578 43 -- 2,347
All other loans 450 17 -- 88 555
------- ------- ------- ------- -------
Total loans (1) $28,275 $27,313 $ 4,017 $ 6,284 $65,889
======= ======= ======= ======= =======
</TABLE>
- --------------
(1) Net of undisbursed loan funds and deferred fees and costs.
The following table sets forth the maturity distribution of the
Company's loan portfolio by type of interest rate at December 31, 1997 (dollars
in thousands):
<TABLE>
<CAPTION>
After One After Five After
Within But Within But Within Ten
One Year Five Years Ten Years Years Total
-------- ---------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Fixed interest rates $ 2,973 $11,029 $ 957 $ 1,036 $15,995
Floating or adjustable
interest rates 25,302 16,284 3,060 5,248 49,894
------- ------- ------- ------- -------
Total loans(1) $28,275 $27,313 $ 4,017 $ 6,284 $65,889
======= ======= ======= ======= =======
</TABLE>
- -------------------
(1) Net of undisbursed loan funds and deferred fees and costs.
24
<PAGE> 25
Nonperforming Assets
The Company's consolidated loan portfolio is comprised primarily of the
Bank's loan portfolio. The risk of non-payment of loans is an inherent aspect of
commercial banking. The degree of perceived risk is taken into account in
establishing the structure of, interest rates on and security for specific loans
and for various types of loans. The Bank attempts to minimize its credit risk
exposure by using thorough loan application, credit review and approval
procedures. Lending officers of the Bank have been assigned lending authority up
to $10,000 on an unsecured basis. Two executive officers of the Bank have
lending authority up to $50,000. Loans which exceed $50,000 are submitted for
approval to the Bank's Loan Committee. The Bank's loan portfolio is continually
reviewed by loan officers, the President, and the Board of Directors' Audit and
Loan Committees. The performance of loans is evaluated on the basis of a
thorough review of each borrower's overall creditworthiness, collateral, and
other elements which in the judgment of officers and senior management
demonstrate the ability of the borrower to continue in business and to meet the
repayment terms of the loan(s). If subsequent events lead to a reasonable doubt
as to the repayment of a loan in accordance with the agreed upon repayment
terms, even though the financial condition of the borrower or the collateral may
ultimately be sufficient to reduce or satisfy the obligation, the loan may be
placed on a non-accrual basis pending sale of any collateral or the
determination that other sources of repayment exist. When a loan is placed on a
non-accrual basis, income recognition is discontinued. No further interest
income is recognized on such loans until a subsequent determination removes
doubt as to collectibility.
It is the current policy of the Bank to place loans which are unpaid 90
days past their maturity date, or loans which have principal or interest
payments 90 days past due, on a non-accrual status unless a determination is
made upon evaluation of the collateral or other circumstances indicate that the
Bank, as the case may be, will be able to recover all principal and accrued
interest.
25
<PAGE> 26
The following table summarizes nonperforming assets by (1) loans past due
90 days or more and not on non-accrual, (2) loans accounted for on a non-accrual
basis and (3) real estate held for sale (dollars in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
----- ----
<S> <C> <C>
Accruing loans past due
90 days or more $ -- $ 210
Non-accrual loans $ 781 $1,424
------ ------
Total nonperforming loans $ 781 $1,634
Real estate held for sale $1,780 $2,749
------ ------
Total nonperforming assets $2,561 $4,383
====== ======
Nonperforming loans to total loans 1.19% 2.37%
Nonperforming assets to total assets 2.53% 4.19%
Allowance for loan losses to 41.86% 28.75%
nonperforming assets
Allowance for loan losses to nonperforming loans 137.26% 77.11%
</TABLE>
Non-performing loans, comprised of non-accrual loans and accruing loans
past due 90 days or more, decreased by 52.2% from December 31, 1996, and
represented 0.77% of total assets at December 31, 1997, as compared to 1.6% of
total assets at December 31, 1996. Non-performing loans represented 1.19% of
total loans for the year ended December 31, 1997 as compared to 2.37% for the
year ended December 31, 1996. The reduction in non-performing loans is the
result of management's continued efforts to address its problem loans, its
continued efforts to liquidate its nonperforming assets and an overall
improvement in the local economy.
The amount of interest income foregone in 1997 and 1996 on non-accrual
loans was $94,000 and $135,000, respectively. The amount of interest actually
included in income in 1997 and 1996 on non-accrual loans was $145,000 and
$51,000, respectively.
26
<PAGE> 27
At December 31, 1997 and 1996, the Company's total recorded investment in
impaired loans was $4.6 million and $3.7 million, respectively. At December 31,
1997, $4.6 million of the impaired loans had a specific allowance for loan
losses in the amount of $0.5 million. Of the $4.6 million of impaired loans at
December 31, 1997, $3.5 million was represented by three loans, which accounted
for $0.3 million of the specific allowance for loan losses at December 31, 1997.
The average recorded investment in impaired loans for the years ended December
31, 1997 and 1996 were $4.4 million and $1.7 million, respectively. The related
amount of interest income recognized during the period on loans impaired was
$0.5 million for the year 1997 and $0.1 million for the years ended 1996 and
1995.
There were no loans at December 31, 1997 where the known credit problems
of a borrower caused the Bank to have serious doubts as to the borrower's
ability to comply with the present loan repayment terms and which would result
in such loan being included as a non-accrual, past due or restructured loan at
some future date.
The Company had real estate held for sale of $1.8 million at December 31,
1997 as compared to $2.7 million at December 31, 1996. The Company is carrying
these properties at the lower of cost or fair value, less estimated selling
costs and less a valuation allowance which amounted to $103,000 and $120,000 at
December 31, 1997 and 1996, respectively. While management does not expect any
substantial additional losses on the sale of the remaining properties in excess
of the allowances already provided in the consolidated financial statements, no
assurance can be given that additional losses will not occur.
Summary of Loan Loss Experience
The Bank maintains an allowance for loan losses, which is reduced by net
loan charge-offs and increased by the provision for loan losses charged to
operating expense. The amount of additions to the provision for loan losses and
the level of the allowance for loan losses are based upon the Bank's loan loss
experience, the performance of loans in the Bank's portfolio, evaluations of
collateral for such loans, the prospects and financial condition of the
respective borrowers or guarantors, general economic conditions, and such other
factors as, in management's judgment, deserve current recognition in the
estimation of probable loan losses.
27
<PAGE> 28
The following table shows the allowance for loan losses, loans charged
off, recoveries on loans previously charged off, the amount of the provision for
loan losses charged to operating expense, the loans outstanding, and certain
pertinent ratios as of the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1997 1996
-------- --------
<S> <C> <C>
Balance beginning of period $ 1,260 $ 1,510
Loans charged-off:
Real estate
Construction -- (57)
Mortgage (1,425) (542)
Commercial and industrial (151) (560)
Loans to individuals (23) --
-------- --------
Total loans charged-off (1,599) (1,159)
Recoveries on loans charged-off 169 23
-------- --------
Net charge-offs (1,430) (1,136)
Provision for loan losses 1,242 886
-------- --------
Balance at end of period $ 1,072 $ 1,260
Total loans
Average $ 67,319 $ 69,703
At end of period (1) $ 65,889 $ 68,889
Ratios:
Net charge-offs
to average total loans 2.12% 1.63%
Allowance for loan losses
to total loans at end of period 1.63% 1.83%
Allowance for loan losses
as a % of nonperforming loans 137.26% 77.11%
</TABLE>
- ------------------
(1) Net of undisbursed loan funds and deferred fees and costs.
28
<PAGE> 29
An allocation of the allowance for loan losses to the major
loan categories has been made for the purposes of this report as set forth in
the following table (dollars in thousands). The allocations are estimates based
upon the same factors as considered by management in determining the amount of
additional provisions to the allowance for loan losses and the aggregate level
of the allowance for loan losses.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1997 1996
----------------------- -----------------------
Percent Percent
of Loans of Loans
Allowance in each Allowance in each
for Loan Category to for Loan Category to
(dollars in thousands) Losses Total Loans Losses Total Loans
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Real estate - construction
and development $ 133 5.0% $ 159 8.6%
Real estate - mortgage 379 22.9 612 22.1
Commercial and industrial 527 67.7 466 67.1
Loans to individuals 27 3.6 22 2.1
All other loans 6 0.8 1 0.1
------ ----- ------ -----
Total $1,072 100.0% $1,260 100.0%
====== ===== ====== =====
</TABLE>
Management believes that the allowance for loan losses of $1.1 million and
$1.3 million or approximately 1.63% and 1.83% of total loans at December 31,
1997 and 1996 was adequate to absorb known and inherent risks in the loan
portfolio. Allowance for loan losses to nonperforming loans improved to 137.26%
at December 31, 1997, from 77.11% at December 31, 1996. No assurance can be
given, however, that economic conditions which may adversely affect the Bank's
service areas or other circumstances will not be reflected in increased losses
in the Bank's loan portfolio. In addition, regulatory agencies, as an integral
part of their examination process, periodically review the Bank's allowance for
loan losses. Such agencies may require the Bank to recognize additions to the
allowance or to take charge-offs (reductions in the allowance) in anticipation
of losses. See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Capital Resources."
While management believes it has adequately provided for losses and does
not expect any material loss on the above loans in excess of allowances already
recorded in the consolidated financial statements, no assurance can be given
that additional loans will not become delinquent or that the collateral for such
loans will be sufficient to prevent losses in the event of foreclosure.
The allowance for loan losses should not be interpreted as an indication
that charge-offs will occur in these amounts or proportions, or that the
allocation indicates future charge-off trends. Furthermore, the portion
allocated to each loan category is not the total amount available for future
losses that might occur within such categories, since, as previously stated, the
total allocation and provision is a general allocation and provision applicable
to the entire portfolio.
29
<PAGE> 30
Asset/Liability Management and Liquidity
Asset/Liability Management
The Company's policy is to closely match its level of rate sensitive
assets and rate sensitive liabilities within a limited range thereby reducing
its exposure to interest rate fluctuations. In connection with the asset and
liability management objectives, various plans have been put into effect
including changes in the composition of assets and liabilities and the
initiation and emphasis on adjustable and floating rate loan programs to achieve
a closer match between assets and liabilities with various maturities or
repricing characteristics as considered desirable. Generally, when rate
sensitive assets exceed rate sensitive liabilities, the net interest margin is
expected to be positively impacted during periods of increasing interest rates
and negatively impacted during periods of decreasing interest rates, and
conversely when rate sensitive liabilities exceed rate sensitive assets, net
interest margin is expected to be negatively impacted during periods of
increasing interest rates and positively impacted during periods of decreasing
interest rates.
The following table sets forth information concerning interest rate sensitivity
of the Company's consolidated interest earning assets and interest bearing
liabilities as of December 31, 1997 (dollars in thousands). Assets and
liabilities are classified by the earliest possible repricing or maturity date,
whichever comes first.
<TABLE>
<CAPTION>
Non-rate
Immediate Three Sensitive &
Through Through Six Through Over Twelve
Three Months Six Months Twelve Months Months Total
------------ ---------- ------------- ----------- -------
<S> <C> <C> <C> <C> <C>
Interest earning Assets
Cash equivalents $15,000 $ -- $ -- $-- $15,000
Securities held to maturity 1,098 1,000 501 8,136 10,735
Loans receivable 48,684 1,583 2,205 13,417 65,889
------- ------ ------ ------- -------
Total interest earning assets $64,782 $2,583 $2,706 $21,553 $91,624
Interest bearing liabilities
Interest-bearing deposits 55,559 1,740 2,548 896 60,743
------- ------ ------ ------- -------
Total interest bearing liabilities $55,559 $1,740 $2,548 $896 $60,743
------- ------ ------ ------- -------
Interest rate sensitivity gap $9,223 $843 $158 $20,657
====== ======= ==== =======
Cumulative interest rate sensitivity gap $9,223 $10,066 $10,224 $30,881
====== ======= ======= =======
</TABLE>
30
<PAGE> 31
Liquidity
The Bank's Asset-Liability Management Committee manages a liquidity
position, the parameters of which are approved by the Board of Directors.
Liquidity is derived from both the asset and liability sides of the balance
sheet. While the Bank relies primarily on deposits for its source of funds, the
Bank had available at December 31, 1997, $15.0 million of federal funds sold
which could be used as an immediate source of funds. In addition, the Bank has
access to a $3.5 million federal funds purchase line of credit from Community
Bank, subject to cancellation, which the Bank can use to meet short term needs.
The Bank also has access to funds through the Federal Reserve Bank discount
window. The Bank maintained at December 31, 1997 approximately 21.48% of its
total assets in liquid assets.
The Committee members are the Chairman of the Board, the President,
who monitors loan funding needs; the Chief Financial Officer & Cashier, who
monitors sources of funds, and who carries out the instructions of the Committee
for securities and large denomination time deposit transactions; and one outside
member of the Board of Directors.
The Company relies on asset/liability management to accommodate
changes in loan demand and core deposit levels. A key aspect of asset/liability
management is liquidity, or the Company's ability to meet possible deposit
withdrawals, to provide for the credit needs of its customers and to take
advantage of investment opportunities as they arise.
Sources of liquidity include payment of dividends from its
subsidiary companies. Payment of dividends is subject to statutory and
regulatory limitations. As a result of past losses, at December 31, 1997, the
Bank had no retained earnings legally available for the payment of cash
dividends. See "Note 13 to the Consolidated Financial Statements".
The Company's most liquid assets are cash and cash equivalents and its
investment portfolio. The levels of these assets are dependent on the Company's
operating, financing and investing activities during any given period. The
liquidity needs of the Company, primarily relate to the Bank. The liquidity
needs of the Company at this time are minimal.
31
<PAGE> 32
Investment Portfolio
The following table shows the carrying value of the Company's portfolio of
securities held to maturity at December 31, 1997 and December 31, 1996 (dollars
in thousands). Securities held to maturity are stated at cost, adjusted for
amortization of premiums and accretion of discounts.
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
------- ------
<S> <C> <C>
Obligations of U.S. and U.S.
government agencies . . . . . . . . . . . . . $10,426 $6,814
Non-taxable municipal bonds . . . . . . . . 210 213
Interest-bearing deposits . . . . . . . . . . . 99 197
------- ------
Total investment securities
held to maturity . . . . . . . . . . $10,735 $7,224
======= ======
</TABLE>
Maturity Distributions of Investment Portfolio
The following table shows the maturities of securities held to maturity at
December 31, 1997 and the weighted average yields of such securities (dollars in
thousands):
<TABLE>
<CAPTION>
Maturing
--------------------------------------------------
After One
Within But Before
One Year Five Years
--------------------- ------------------
Weighted Weighted
Book Average Book Average
Value Yield(1) Value Yield(1) Total
-------- ----- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Obligations of U.S. and U.S.
government agencies $ 2,500 5.73% $ 7,926 6.20% $10,426
Non-taxable municipal bonds -- -- 210 6.50% $ 210
Interest-bearing deposits 99 5.75% -- -- $ 99
------- ---- ------- ---- -------
Total $ 2,599 5.73% $ 8,136 6.21% $10,735
======= ==== ======= ==== =======
</TABLE>
- ----------------
(1) Weighted average yield is computed on a yearly basis and yields on
tax-exempt obligations are computed on a tax equivalent basis.
As of December 31, 1997, the Company held no securities held to maturity
of any issuer (other than securities issued by the U.S. and U.S. government
agencies) with an aggregate carrying value which exceeded 10% of stockholders'
equity and any maturities greater than five years.
32
<PAGE> 33
Sources of Funds - Deposits
The average amounts of deposits, together with average rates
paid thereon, are summarized below (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
Average Average Average Average
Balance Rate Paid Balance Rate Paid
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Demand deposits $27,419 --% $27,401 --%
Savings deposits (1) 51,290 4.26 52,966 3.85
Money market accounts 6,365 1.81 6,324 1.50
Time deposits 8,509 4.99 7,416 4.71
------- --------- ------- ----
$93,583 3.69% $94,107 3.35%
======= ========= ======= ====
</TABLE>
- --------------
(1) Includes NOW Accounts.
Total average deposits decreased by 0.6% or $0.5 million at December 31,
1997 as compared to December 31, 1996. The decrease was primarily related to
normal fluctuations in Demand deposits, Savings deposits and Money market
accounts, as well as, decisions made by the Bank's asset-liability committee.
The remaining maturities of the certificates of deposit $100,000 or more
at December 31, 1997 are as follows (dollars in thousands):
<TABLE>
<S> <C>
3 months or less $2,348
Over 3 through 6 months 1,400
Over 6 through 12 months 1,312
Over 12 months 684
------
Total $5,744
======
</TABLE>
The Banks primary sources of funds are deposits and principal and interest
payments on its loan and securities portfolios. While maturities and scheduled
amortization of loans and securities are, in general, a predictable source of
funds, deposit flows and loan prepayments are greatly influenced by general
interest rates, economic conditions and competition.
33
<PAGE> 34
The Company's liquidity position is monitored on a daily basis. Action
may be taken by any two members of the Committee to satisfy daily liquidity
requirements. Recognizing the cost of liquidity, the Bank maintains
approximately 20% of total assets in liquid assets. The remaining assets are
invested to yield higher rates of return with minimized market or credit risk.
Notes Payable
In June 1997, the Company issued $900,000 of promissory notes to the
following Directors of the Company:
Timothy G. Behunin $300,000
Michael Wagner $300,000
Allan E. Dalshaug $100,000
Howard M. Borris $100,000
Robert J. Schiller $100,000
--------
$900,000
========
The proceeds of these notes were used by the Company to reimburse the Bank for a
tax receivable from the Company. It was determined during a recent Federal
Deposit Insurance Corporation and State Banking Department joint regulatory
examination, that a net tax balance on the Bank's books is a functional
receivable from the Company, and should be repaid. This balance results from the
filing of consolidated tax returns of the Company, under an agreement, with its
subsidiaries, which has been in effect for many years.
The notes bear interest at an initial rate of 10% per annum, but the
interest rate may fluctuate depending upon increases or decreases in the loan's
interest rate of 1.5% in excess of Bank of America's prime rate in effect from
time to time. These promissory notes have a maturity of September 18, 1997, with
an automatic 90 day renewal, subject to renewal at the option of the Company for
a maximum period of up to one year, unless a change is requested by the note
holder.
At December 31, 1997, the Company had $400,000 of promissory notes
outstanding issued to the following Directors of the Company:
Timothy G. Behunin $150,000
Michael Wagner $150,000
Allan E. Dalshaug $ 50,000
Robert J. Schiller $ 50,000
--------
$400,000
========
34
<PAGE> 35
Capital Resources
Management seeks to maintain a level of capital adequate to support asset
growth and credit risks and to ensure that the Company is within established
regulatory guidelines and industry standards. The Company and the Bank are
required to achieve risk-based capital standards and leverage capital standards.
The risk-based capital standards establish capital requirements that are more
sensitive to risk differences between various assets, consider off balance sheet
activities in assessing capital adequacy and minimize the disincentive to
holding liquid, low risk assets. The Company and the Bank are required to
achieve a minimum 8.0% total capital to risk-weighted assets ratio (of which at
least 4.0% must be Tier 1 capital consisting primarily of common stock and
retained earnings, less goodwill).
The following table sets forth the capital ratios of the Company and the
Bank at December 31, 1997 (dollars in thousands).
<TABLE>
<CAPTION>
Company Bank
------------------- -------------------
Amount Ratio Amount Ratio
-------- ------ -------- -----
<S> <C> <C> <C> <C>
Tier 1 capital $ 6,386 8.91% $ 6,593 9.20%
Tier 1 capital
minimum requirements 2,867 4.00% 2,867 4.00%
-------- ----- -------- -----
Excess $ 3,519 4.91% $ 3,726 5.20%
Total capital $ 7,285 10.16% $ 7,491 10.45%
Total capital
minimum requirement 5,735 8.00% 5,733 8.00%
-------- ----- -------- -----
Excess $ 1,550 2.16% $ 1,758 2.45%
Risk-weighted
assets $ 71,686 $ 71,667
Tier 1 capital $ 6,386 6.21% $ 6,593 6.42%
Tier 1 capital
minimum requirement 4,111 4.00%
-------- ----
Memorandum requirement 6,931 6.75%
-------- -----
Excess (deficiency) $ 2,275 2.21% $ (338) (0.33)%
Total average assets $102,771 $102,684
</TABLE>
The leverage ratio consists of tangible Tier 1 capital divided by total average
assets. As of December 31, 1997, the Company and the Bank had leverage ratios of
6.21% and 6.42%, respectively. Regulators have established a minimum leverage
ratio of 4.0% for the highest rated banks. However, institutions experiencing or
anticipating significant growth, or those with other than minimum risk profiles,
will be expected to maintain capital well above the minimum. The Bank is
required under the terms of the Joint Memorandum to maintain a minimum leverage
ratio of 6.75%. See "Item 1. Business -- Supervision and Regulation -- The
Bank."
35
<PAGE> 36
In the year 1995, the Board of Directors of the Company and the Bank
entered into a memorandum of understanding with the Federal Reserve Bank ("the
FRB Memorandum"), and in November 1997, the Board of Directors of the Bank
entered into a joint memorandum of understanding with the FDIC and the DFI
("Joint Memorandum"). Under these Memorandums, the Company, among other things,
may not directly or indirectly, acquire or sell any interest in any entity, line
of business, problem loans or other assets, without the prior written approval
of the Federal Reserve Bank; and may not pay cash dividends without the prior
written consent of the Federal Reserve Bank. The Bank is also required, among
other things, to achieve and maintain Tier 1 capital equal to or above 6.75% of
total assets; the Bank shall have and retain qualified management; establish and
maintain an adequate allowance for loan losses; and not pay cash dividends
without the prior written consent of the FDIC and the DFI.
The Bank at December 31, 1997 was not in compliance with the capital
ratio of 6.75% required under the terms of the Joint Memorandum. As a result,
the Company was not in compliance with the FRB Memorandum. See "ITEM 1. Business
- -- Supervision and Regulation -- The Company" and "ITEM 1. BUSINESS --
Supervision and Regulation -- The Bank". Management believes that compliance
with such capital requirements will be met by March 31, 1998 through a
combination of earnings and a reduction in average assets. However, the Company
and the Bank's, failure to comply with the Memorandum's could result in further
regulatory action. See "ITEM 1. BUSINESS -- Supervision and Regulation --
Capital Standards."
The Company expects that future dividends will depend on continued
profitability and the maintenance of acceptable financial results.
Effects of Inflation
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation.
Virtually all of the assets and liabilities of a financial institution are
monetary in nature. As a result, interest rates have a more significant impact
on a financial institution's performance than the effects of general levels of
inflation.
36
<PAGE> 37
RESULTS OF OPERATIONS
Net Income (Loss)
The Company had a net loss of $0.9 million, or ($0.52) per share in 1997
compared with net income of $0.3 million or $0.20 per share in 1996 and a net
loss of $3.4 million or ($2.01) per share in 1995. The net loss in 1997 was
attributable to additional allowance for loan loss provisions, necessitated by
additional classified loans and loan charge-offs, during the year and a decline
in net interest income and additional income tax provisions. The improved
results for the period ending December 31, 1996, as compared to the same period
in 1995, primarily relate to continued benefits from the reductions in
non-interest expenses and substantial reductions in salaries, and employee
benefits, real estate operations, other non-interest expenses and the Company's
discontinuance of its mortgage banking operations, in the fourth quarter of
1994.
The primary reasons for the net loss in 1995 were the $2.1 million charge,
excluding income tax benefit, representing a settlement during 1995 of a dispute
over repurchase liability relating to mortgage loans originated by BSC, whose
operations were discontinued during the fourth quarter of 1994 (see "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Discontinued Operations and Note 5 to the Consolidated Financial
Statements"), losses of $2.7 million on the sale or writedown of real estate
held for sale, and loan loss provisions of $1.1 million at the Bank. These
losses more than offset the $1.5 million gain on the sale of assets by Business
Credit during 1995. Additionally, the Company did not take full financial
statement benefit for tax losses at the Bank because of uncertainty as to
whether such tax benefit would be realized in the future.
Net Interest Income
A significant component of the Company's operations is net interest
income, which is the difference between interest and fees received on earning
assets and interest paid on deposits and other sources of funds. Net interest
income, when expressed as a percentage of average total interest earning assets,
is referred to as the net interest margin. The Company's net interest income is
affected by the change in the amount and mix of interest-earning assets and
interest-bearing liabilities. It is also affected by changes in yields earned on
interest-earning assets and rates paid on deposits and other borrowed funds.
Approximately 76% of the Bank's loan portfolio adjusts with the prime rate.
37
<PAGE> 38
Analysis of Net Interest Income
Certain information concerning average interest-earning assets and
interest-bearing liabilities and yields earned and rates paid thereon is set
forth in the following table (dollars in thousands).
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------------
1997 1996
---- ----
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Taxable securities $ 11,045 $ 666 6.03% $ 7,197 $ 435 6.04%
Non-taxable securities 211 14 6.64% 308 17 5.52%
Federal funds sold 14,478 783 5.41% 14,925 786 5.27%
Loans receivable, net (1) 65,981 6,958 10.55% 69,703 7,552 10.83%
-------- -------- -------- -------- -------- -----
Total interest earning assets 91,715 8,421 9.18% $ 92,133 8,790 9.54%
======== ======== ======== ======== ======== =====
INTEREST-BEARING LIABILITIES:
Savings deposits (2) 51,290 1,990 3.88% 52,966 2,041 3.85%
Money market accounts 6,365 114 1.79% 6,324 95 1.50%
Time deposits 8,509 398 4.68% 7,416 349 4.71%
Notes payable 392 38 9.69% 443 44 9.93%
-------- -------- -------- -------- -------- -----
Total interest bearing liabilities $ 66,556 2,540 3.82% $ 67,149 $ 2,529 3.77%
======== ======== ======== ======== ======== =====
Net interest income $ 5,881 $ 6,261
Net interest spread 5.36% 5.77%
Net interest margin (3) 6.41% 6.79%
</TABLE>
- --------------------
(1) The principal amount of nonaccrual loans is included in the average
balance of loans receivable, net but only the actual interest recognized
during the year is included in income/expense.
(2) Includes NOW Accounts.
(3) Net interest margin is net interest income divided by total average
interest-earning assets.
38
<PAGE> 39
Analysis of Changes in Net Interest Income
The following table presents the dollar amount of changes in interest
income and interest expense for the major categories of interest-earning assets
and interest-bearing liabilities and the amount of change attributable to
changes in volumes and changes in interest rates for 1997 compared to 1996 and
1996 compared to 1995 (dollars in thousands). The change in interest income due
to both volume and yield/rate has been allocated to volume and yield/rate
changes in proportion to the relationship of the absolute dollar amounts of the
change in each.
<TABLE>
<CAPTION>
1997 vs. 1996 1996 vs. 1995
Increase (Decrease) Increase (Decrease)
Due to Changes in: Due to Changes in:
------------------------------ ------------------------------
Yield/ Net Yield/ Net
Volume Rate Change Volume Rate Change
------- ------- ------- ------- ------- -------
Income from Interest earning assets:
<S> <C> <C> <C> <C> <C> <C>
Taxable securities $ 232 $ (1) $ 231 $ 20 $ (110) $ (90)
Non-taxable securities (6) 3 (3) (5) 3 (2)
Federal funds sold (24) 21 (3) 2 (55) (53)
Loans receivable, net (400) (194) (594) (1,557) (1,888) (3,445)
------- ------- ------- ------- ------- -------
Total interest income (198) (171) (369) (1,540) (2,050) (3,590)
Expense on Interest bearing liabilities:
Savings deposits (1) (65) 14 (51) (99) (514) (613)
Money market accounts 1 18 19 (24) (19) (43)
Time deposits 51 (2) 49 (9) 28 19
Notes payable (5) (1) (6) (975) (67) (1,042)
------- ------- ------- ------- ------- -------
Total interest expense (18) 29 11 (1,107) (572) (1,679)
------- ------- ------- ------- ------- -------
Change in net interest income (180) (200) (380) $ (433) $(1,478) $(1,911)
======= ======= ======= ======= ======= =======
</TABLE>
- --------------------
(1) Includes NOW Accounts.
39
<PAGE> 40
Net interest income decreased $0.4 million or 6.0% for the period ended
December 31, 1997 as compared to the same period in 1996. The decrease in net
interest income was primarily attributable to a decline in interest income
received on loans receivable. Average loans receivable outstanding during 1997
as compared to 1996 and 1995, were $66 million, $70 million and $83 million,
respectively. Average yield on loans receivable decreased to 10.55% in 1997 from
10.83% in 1996 and 13.33% in 1995. The decline in average yield and average
volume from 1995 to 1996 reflects the sale of the higher yielding Business
Credit loans, during the third quarter of 1995. Interest income also decreased
in 1996 compared to 1995 due in part to a decrease in the average volume of
interest earning assets of $12.5 million or 12.0% due to the sale of such loans.
Provision for Loan Losses
The provision for loan losses is determined by management based upon the
Company's loan loss experience, the performance of loans in the Company's
portfolio, the quality of loans in the Company's portfolio, evaluation of
collateral for such loans, the economic conditions affecting collectibility of
loans, the prospects and financial condition of the respective borrowers or
guarantors and such other factors which in management's judgment deserve
recognition in the estimation of probable loan losses. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance or to take charge-offs (reductions in the
allowance) in anticipation of losses.
A substantial portion of the Company's loan portfolio, including a
substantial portion of its commercial and industrial loans, is secured by real
estate collateral, substantially all of which is located in Southern California.
While in most cases the amount of the loan is less than 75% of the appraised
value of the property or the cost of the project, the Company has suffered from
the effects of the downturn in the real estate market and continues to be
vulnerable to further such downturns. See "ITEM 1. BUSINESS. -- Economic
Environment".
The Company recorded a loan loss provision in 1997 of $1,242,000, compared
to $886,000 in 1996 and $1,104,000 in 1995. The additional provision in 1997 was
the result of an increase in charged-off loans during the year. The lower
provision in 1996 as compared to 1995 is a reflection of the $2.5 million or 37%
reduction in nonperforming assets at December 31, 1996 as compared to December
31, 1995. The 1995 provision was higher than 1994 because of higher levels of
non-performing loans, foreclosures on defaulted loans and charge-offs. See "ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Nonperforming Assets and Summary of Loan Loss Experience."
41
<PAGE> 41
Non-Interest Income
The following table sets forth information by category of non-interest
income for the Company for the past three years (dollars in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Service charges on deposit
accounts $ 687 $ 512 $ 319
Gain on sale of SBA loans 371 11 133
Gain on sale of
Business Credit Assets -- -- 1,504
Other 84 1,106 518
------ ------ ------
Total $1,142 $1,629 $2,474
====== ====== ======
</TABLE>
Non-interest income decreased to $1.1 million in 1997 from $1.6 million in
1996 and $2.5 million in 1995. Non-interest income in 1996 included
approximately $850,000 of income from (i) income recognized from the reversal of
various accrued liabilities which were deemed no longer necessary, and (ii) the
settlement of certain litigation. Non-interest income for 1995 included a gain
from the sale of Business Credit assets. See "RESULTS OF OPERATIONS - Sale of
Business Credit Assets". In addition, the Bank continued to benefit from
increased service charges on deposit accounts as well as gains recognized on the
sale of SBA loans, during 1997 as compared to 1996 and 1995. In 1997,
approximately $4.2 million of the guaranteed portion of SBA loans were sold for
a gain of $371,000.
Sale of Business Credit Assets
During the third quarter of 1995, the Company sold substantially all the
assets of Business Credit. The sale of Business Credit assets was initiated, in
order to raise capital to meet and exceed capital requirements previously
imposed by regulators on the Bank, due to losses in the mortgage banking
subsidiary, and to take advantage of an opportunity to make a substantial
premium on the sale at this time in the market. Approximately $15.2 million of
Business Credit loans were sold to First Capital Corporation in a transaction
which resulted in a $1.5 million gain, after deducting expenses relating to the
transaction.
Non-Interest Expense
Non-interest expense as a percentage of average total assets was 6.2% in
1997, compared with 6.5% in 1996, and 9.7% in 1995. The reduction in
non-interest expense primarily relate to continued savings achieved through
operating efficiencies, and to a larger extent lower cost associated with real
estate operations at the Bank.
40
<PAGE> 42
Non-interest expense decreased to $6.4 million in 1997 from $6.7 million
in 1996 and $10.1 million in 1995. The savings achieved in noninterest expense
during 1997 as compared to 1996, reflects the lower cost associated with real
estate operations. Real estate operations, net has continued to decline as a
result of the Bank disposing of its real estate held for sale and the
elimination of costs associated with maintaining those assets. The reduction in
non-interest expense for 1996 as compared to 1995, is a result of savings in
salaries and employee benefits of $1.1 million or 27.2%, real estate operations,
net of $2.0 million or 72.2% and other non-interest expenses of $0.3 million or
14.8% for the period ending December 31, 1996 as compared to the same period in
1995.
Income Taxes
Income tax expense for 1997 amounted to $314,000 compared to
$3,000 in 1996 and $929,000 in 1995. The increase in the 1997 income tax expense
was mainly the result of the disallowance of a portion of an operating loss
carryback claim for federal income tax purposes. The large income tax provision
in 1995 was related to the substantial income from the sale of assets of
Business Credit, which was not offset by income tax benefits at the Bank because
of uncertainty as to the Bank's ability to realize such benefits in the future.
The low tax expense for 1996 was due to the reduction in the valuation allowance
for deferred tax assets. No tax benefit was provided in 1997 because of
uncertainty as to the Bank's ability to realize additional deferred tax
benefits. For further discussion see Note 9 to the Consolidated Financial
Statements.
Discontinued Operations
As a result of continued losses from operations, higher
interest rates and the generally poor market for residential mortgage loans, the
Company, in the fourth quarter of 1994, discontinued its mortgage banking
operations. During 1995, the Company significantly reduced its exposure to
future repurchase liability, by settling a dispute over repurchase liability
relating to mortgage loans originated by BSC. As a result of the settlement, an
additional $2.1 million charge, excluding income tax benefit, was incurred
representing substantially all of the loss from discontinued operations for
1995.
At December 31, 1997, the Company had outstanding repurchase
requests relating to loans with a principal balance of $0.3. The Company
maintained an allowance for losses on loan repurchases which amounted to $0.1
million at December 31, 1997 as compared to $0.4 million at December 31, 1996.
This allowance is carried in other liabilities on the balance sheet. In
determining the amount of this allowance, the Company considered the exposure of
the Company to repurchases which takes into account the Company's past
experience with repurchases, the potential for future repurchases and the losses
thereon.
42
<PAGE> 43
ITEM 7A. DISCLOSURE OF MARKET RISK SENSITIVE INSTRUMENTS:
The information called for by this item is contained in "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Maturities and Sensitivity to Changes in Interest Rates" and "--
Asset/Liability Management and Liquidity," and is incorporated herein by
reference. At December 31, 1997 and 1996, the Company did not hold any
derivative financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Financial Statements included at page F-2 of this
Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE: NONE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Except as hereinafter noted, the information concerning directors
and executive officers of the Company is incorporated by reference from the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after the end of the last fiscal year. For information
concerning executive officers of the Company, see "ITEM 4(A).
EXECUTIVE OFFICERS OF REGISTRANT."
ITEM 11. EXECUTIVE COMPENSATION.
Information concerning executive compensation is incorporated by
reference from the Company's definitive Proxy Statement to be filed pursuant to
Regulation 14A within 120 days after the end of the last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information concerning security ownership of certain beneficial
owners and management is incorporated by reference from the Company's definitive
Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the
end of the last fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information concerning certain relationships and related
transactions with management and others is incorporated by reference from the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after the end of the last fiscal year.
43
<PAGE> 44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Financial Statements and Report. Reference is made to the Index to Financial
Statements at page F-2 for a list of financial statements filed as part of this
Report on Form 10-K. Financial Statement schedules have been omitted either
because they are not required or not applicable or the required information is
shown in the consolidated financial statements or related notes thereto.
(b) Reports on Form 8-K. None.
(c) Exhibits.
(1) Reference is made to the Index to Exhibits following the financial
statements for a list of exhibits filed as part of this Report on Form 10-K.
(2) Included among the Exhibits filed as part of this Report on Form 10-K are
the following Executive Compensation Plans and Arrangements:
1. 1982 Stock Option Plan, as amended -- Annual Report on Form
10-K for the fiscal year ended December 31, 1988, Exhibit 10.5.
2. Sterling Bancorporation Employee Stock Ownership Plan and Trust
-- Annual Report on Form 10-K for the fiscal year ended
December 31, 1986, Exhibit 10.6.
3. Amended and Restated Sterling Bancorporation Employee Stock
Ownership Plan and Trust -- Annual Report on Form 10-K for
the fiscal year ended December 31, 1995, Exhibit 10.6.1.
4. Employment Agreement dated January 3, 1998, between the
Company and Allan Dalshaug -- Annual Report on Form 10-K for
the fiscal year ended December 31, 1997, Exhibit 10.19.4
5. Employment Agreement, dated January 1, 1998, between Sterling
Bank and Joseph Carona -- Annual Report on Form 10-K for the
fiscal year ended December 31, 1997, Exhibit 10.21.3
44
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on the
27th day of March, 1998.
STERLING WEST BANCORP
(Registrant)
By /s/ Allan E. Dalshaug
----------------------------------
Allan E. Dalshaug,
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Allan E. Dalshaug Chairman of the March 27, 1998
- -------------------------- Board, President, Chief
Allan E. Dalshaug Executive Officer and
Director (Principal
Executive Officer)
/s/ Joseph C. Carona Chief Financial March 27, 1998
- -------------------------- Officer (Principal
Joseph C. Carona Financial and Accounting
Officer)
/s/ Timothy G. Behunin Director March 27,1998
- --------------------------
Timothy G. Behunin
/s/ Howard M. Borris Director March 27, 1998
- --------------------------
Howard M. Borris
/s/ Audrey J. Fimpler Director March 27, 1998
- --------------------------
Audrey J. Fimpler
/s/ Hassan Izad Director March 27, 1998
- --------------------------
Hassan Izad
/s/ Robert J. Schiller Director March 27, 1998
- --------------------------
Robert J. Schiller
/s/ Michael Wagner Director March 27, 1998
- --------------------------
Michael Wagner
</TABLE>
45
<PAGE> 46
REPORT ON CONSOLIDATED
FINANCIAL STATEMENTS
STERLING WEST BANCORP AND SUBSIDIARIES
December 31, 1997, 1996 and 1995
F-1
<PAGE> 47
INDEX
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of KPMG Peat Marwick LLP, Independent Auditors....................... F-3
Consolidated balance sheets as of December 31, 1997 and 1996................ F-4
Consolidated statements of operations for the years ended December
31, 1997, 1996, and 1995.................................................... F-5
Consolidated statements of stockholders' equity for the years ended
December 31, 1997, 1996, and 1995........................................... F-6
Consolidated statements of cash flows for the years ended December 31,
1997, 1996, and 1995....................................................... F-7
Notes to consolidated financial statements F-8
</TABLE>
F-2
<PAGE> 48
Independent Auditors' Report
The Board of Directors
Sterling West Bancorp:
We have audited the accompanying consolidated balance sheets of Sterling West
Bancorp and subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sterling West
Bancorp and subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
March 24, 1998
F-3
<PAGE> 49
Sterling West Bancorp and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
==============================
1997 1996
------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 6,836,000 $ 5,929,000
Federal funds sold 15,000,000 18,393,000
Securities held to maturity
(fair value of $10,811,000 at December 31, 1997 and
$7,204,000 at December 31, 1996) (Note 3) 10,735,000 7,224,000
Loans receivable, net (Notes 4 and 7) 64,817,000 67,629,000
Real estate held for sale (Note 6) 1,780,000 2,749,000
Fixed assets
Land and building 246,000 243,000
Furniture and equipment 3,216,000 3,088,000
Leasehold improvements 1,412,000 1,408,000
------------- -------------
4,874,000 4,739,000
Less accumulated depreciation & amortization (3,829,000) (3,583,000)
------------- -------------
1,045,000 1,156,000
Accrued interest receivable 563,000 589,000
Other assets (Note 9) 474,000 892,000
============= =============
$ 101,250,000 $ 104,561,000
============= =============
LIABILITIES
Deposits $ 33,331,000 $ 32,541,000
Demand 47,057,000 50,786,000
Savings and NOW 5,073,000 5,778,000
Money market 5,744,000 3,720,000
Time deposits $100,000 or greater 2,869,000 3,361,000
------------- -------------
Other time deposits 94,074,000 96,186,000
Notes payable (Note 8) 400,000 --
Other liabilities (Note 5) 390,000 1,114,000
------------- -------------
Commitments and contingencies (Note 4, 10 and 11) 94,864,000 97,300,000
STOCKHOLDERS' EQUITY (Note 13)
Common stock - authorized 5,000,000
shares without par value; issued and
outstanding 1,712,419 shares in 1997 and
1,710,214 shares in 1996 8,697,000 8,686,000
Accumulated deficit (2,311,000) (1,425,000)
------------- -------------
6,386,000 7,261,000
------------- -------------
$ 101,250,000 $ 104,561,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 50
Sterling West Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended December 31,
============================================
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Interest income
Loans $ 6,958,000 $ 7,552,000 $ 10,997,000
Federal funds sold 783,000 786,000 839,000
Securities held to maturity (Note 3) 680,000 452,000 544,000
------------ ------------ ------------
8,421,000 8,790,000 12,380,000
Interest expense
Savings and NOW 1,990,000 2,041,000 2,654,000
Money market 114,000 95,000 138,000
Time deposits $100,000 or greater 189,000 237,000 165,000
Other time deposits 209,000 112,000 165,000
Notes payable 38,000 44,000 1,086,000
------------ ------------ ------------
2,540,000 2,529,000 4,208,000
------------ ------------ ------------
Net interest income 5,881,000 6,261,000 8,172,000
Provisions for loan losses (Note 4) 1,242,000 886,000 1,104,000
------------ ------------ ------------
Net interest income after provisions for loan losses 4,639,000 5,375,000 7,068,000
Non-interest income
Service charges on deposit accounts 687,000 512,000 319,000
Gain on sale of SBA loans 371,000 11,000 133,000
Gain on sale of Business Credit assets -- -- 1,504,000
Other (Note 14) 84,000 1,106,000 518,000
------------ ------------ ------------
1,142,000 1,629,000 2,474,000
Non-interest expenses
Salaries, wages and employee benefits 2,843,000 2,850,000 3,914,000
Occupancy (Note 15) 835,000 830,000 841,000
Furniture and equipment 200,000 251,000 343,000
Real estate operations, net (Note 6) 515,000 756,000 2,717,000
Other (Note 14) 1,960,000 1,971,000 2,313,000
------------ ------------ ------------
6,353,000 6,658,000 10,128,000
Income (loss) from continuing operations
before income taxes (572,000) 346,000 (586,000)
Income tax provision (Note 9) 314,000 3,000 929,000
------------ ------------ ------------
Income (loss) from continuing operations (886,000) 343,000 (1,515,000)
Loss from discontinued operations, net of taxes (Note 5) -- -- (1,924,000)
------------ ------------ ------------
NET INCOME (LOSS) $ (886,000) $ 343,000 $ (3,439,000)
============ ============ ============
Income (loss) per common share:
$ (0.52) $ 0.20 $ (2.01)
Basic
$ (0.52) $ 0.20 $ (2.01)
Diluted
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 51
Sterling West Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Three years
ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Retained
earnings
(accumulated
Shares Common deficit),
outstanding Stock restricted Total
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at January 1, 1995 1,710,214 $ 8,686,000 $ 1,671,000 $ 10,357,000
Net loss -- -- (3,439,000) (3,439,000)
--------- ------------ ------------ ------------
Balance at December 31, 1995 1,710,214 8,686,000 (1,768,000) 6,918,000
Net income -- -- 343,000 343,000
--------- ------------ ------------ ------------
Balance at December 31, 1996 1,710,214 8,686,000 (1,425,000) 7,261,000
Exercise of stock options 2,205 11,000 -- 11,000
Net loss -- -- (886,000) (886,000)
--------- ------------ ------------ ------------
Balance at December 31, 1997 1,712,419 $ 8,697,000 $ (2,311,000) $ 6,386,000
========= ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 52
Sterling West Bancorp and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------------
1997 1996 1995
------------ ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net Income (loss) $ (886,000) $ 343,000 $ (3,439,000)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 249,000 270,000 305,000
Provision for loan losses 1,242,000 886,000 1,104,000
Provision for deferred taxes (100,000) -- 603,000
Provision for losses on real estate held for sale 580,000 193,000 2,424,000
Decrease in accrued interest receivable 26,000 136,000 229,000
Decrease (increase) in other assets 518,000 (34,000) 41,000
Decrease in assets of discontinued operations -- 630,000 3,541,000
Decrease in other liabilities (724,000) (639,000) (1,611,000)
----------- ----------- -----------
Total adjustments 1,791,000 1,442,000 6,636,000
----------- ----------- -----------
Net cash provided by operating activities 905,000 1,785,000 3,197,000
----------- ----------- -----------
Cash flows from investing activities
Proceeds from maturities of securities 1,999,000 1,948,000 4,675,000
Purchase of securities (5,510,000) (1,558,000) (5,313,000)
Net (increase) decrease in loans receivable 1,570,000 (328,000) 18,916,000
Proceeds from sale of real estate 389,000 4,175,000 1,150,000
Payments on real estate repurchased
from investors -- -- (1,629,000)
Purchase of fixed assets (138,000) (211,000) (347,000)
Net cash provided by investing activities
----------- ----------- -----------
(1,690,000) 4,026,000 17,452,000
----------- ----------- -----------
Cash flows from financing activities
Net increase (decrease) in demand deposits,
savings and other money market accounts (3,644,000) (16,798,000) 6,972,000
Net increase (decrease) in time deposits 1,532,000 609,000 (1,468,000)
Proceeds from issuance of notes payable 900,000 -- --
Repayments of notes payable (500,000) -- --
Net decrease in notes payable to
financial institutions -- (1,372,000) (9,034,000)
Payments on maturing promissory notes -- -- (1,493,000)
Proceeds from exercise of stock options 11,000 -- --
------------ ------------ ------------
Net cash used in financing activities (1,701,000) (17,561,000) (5,023,000)
------------ ------------ ------------
Net (decrease) increase in cash and Cash equivalents (2,486,000) (11,750,000) 15,626,000
------------ ------------ ------------
Cash and cash equivalents at beginning of period 24,322,000 36,072,000 20,446,000
------------ ------------ ------------
Cash and cash equivalents at end of period $ 21,836,000 $ 24,322,000 $ 36,072,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 53
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Sterling West Bancorp (the Company) is a bank holding company organized as a
California corporation in 1982. It is the parent company for its wholly owned
subsidiaries, Sterling Bank (Bank), and the Bank's wholly owned subsidiary BSC
Mortgage Corporation (BSC); and Sterling Business Credit, Inc. (Business
Credit). Through its subsidiaries the Company continues to conduct banking and
commercial finance business in the state of California. During the fourth
quarter of 1994 the Company discontinued its mortgage banking operation
substantially all of which were performed by BSC. During the third quarter of
1995 the Company sold most of the assets of Business Credit.
Principles of consolidation
The consolidated financial statements include the accounts of Sterling West
Bancorp and its wholly-owned subsidiaries. All material intercompany balances
and transactions have been eliminated in consolidation. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
revenues and expenses. Actual results could differ from those estimates. Certain
reclassifications have been made to the consolidated financial statements for
1996 and 1995 to conform to the 1997 presentation.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses, the
valuation of real estate and the valuation of deferred tax assets. Management
believes that the allowances established for losses on loans and real estate are
adequate. While management uses available information to recognize losses on
loans and real estate, future additions to the allowances may be necessary based
on changes in economic conditions. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the Company's
allowances for losses on loans and real estate. Such agencies may require the
Company to recognize additions to allowances based on their judgments about
information available to them at the time of their examination.
The Company is required to carry its real estate owned at the lower of cost or
fair value, minus selling costs. Fair value estimates for real estate owned are
determined by current appraisals and, where no active market exists for a
particular property, discounting a forecast of expected cash flows at a rate
commensurate with the risk involved.
Cash equivalents
Cash and cash equivalents include cash and due from banks and federal funds
sold. Generally, federal funds are purchased and sold for a one-day period. For
purposes of the Statements of cash flows, the Company considers all highly
liquid debt instruments with original maturities of three months or less to be
cash equivalents.
F-8
<PAGE> 54
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities held to maturity
Securities held to maturity are stated at cost, adjusted for amortization of
premiums and accretion of discounts. The amortization and accretion is based on
a method which approximates the interest method. Such amortization and accretion
are reflected in interest income on securities held to maturity in the
accompanying consolidated statements of operations. The carrying value of these
assets is not adjusted for temporary declines in fair value since the Company
intends and has the ability to hold them to their maturity. To the extent that
there is a decline in fair value which is other than temporary, the security
shall be written down to fair value with a charge to earnings for the difference
between such value and amortized cost.
Interest and fees on loans
Interest income is accrued daily as earned on all loans. Interest income is not
recognized on loans if collection of the interest is deemed by management to be
unlikely. Loans are generally placed on non accrual status after being
delinquent 90 days. Loan origination, commitment and other fees and direct costs
associated with the origination of loans are deferred and amortized into
interest income over the lives of the respective loans using a method which
approximates the interest method.
Provision and allowance for loan losses
The determination of the allowance for loan losses is based on analysis of the
loan portfolio and reflects an amount which, in management's judgment, is
adequate to provide for probable and estimable loan losses after giving
consideration to the character of the loan portfolio, current economic
conditions, past loan loss experience, geographic and industry concentration,
delinquency trends and such other factors as deserve current recognition in
estimating loan losses. While management uses available information to recognize
loan losses, future additions to the allowance may be necessary based on changes
in the aforementioned factors. Regulatory agencies, as an internal part of their
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance or to
take charge-offs in anticipation of losses.
Loans are evaluated for impairment as part of the Company's normal internal
asset review process. A loan is impaired when, based on current circumstances
and events, a creditor will be unable to collect all amounts contractually due
(both principal and interest) under a loan agreement. When a loan is determined
to be impaired, a writedown is taken or an allowance is established which is
based upon the difference between the investment in the loan and one of the
following methodologies: (i) the present value of expected cash flows from the
loan discounted at the loan's effective interest rate, (ii) an observable market
price, or (iii) the fair value of the loan's underlying collateral. While the
measurement of impairment depends upon the specific facts and circumstances
involving each applicable loan, the Company generally measures such impairment
utilizing the latter methodology. Impaired loans which are performing under the
contractual terms are reported as performing loans, and cash payments are
allocated to principal and interest in accordance with the terms of the loan.
F-9
<PAGE> 55
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loan sales
The Company periodically sells the guaranteed portion of Small Business
Administration (SBA) loans and other loans that it originates. At the time of
sale, the cost basis of the loan is allocated based on the relative fair value
of the portion sold, the portion retained and the servicing rights. Gain or loss
is calculated using the sales proceeds and allocated cost basis of the portion
of the loan sold. The servicing asset is amortized in proportion to and over the
period of estimated net servicing income.
Fixed assets
Depreciation is provided in amounts sufficient to relate the cost of depreciable
assets to operations over their estimated useful lives. Leasehold improvements
are amortized over the lives of the respective leases or the service lives of
the improvements, whichever is shorter. The straight-line method of depreciation
is used.
Real estate held for sale
Real estate acquired through foreclosure is initially recorded at the lower of
the balance of the related mortgage loan or estimated fair value less estimated
selling costs. Fair value is generally estimated based on the most recent
appraisal received by the Company and adjusted for known trends in local
markets. Subsequent declines in fair value are charged to income, along with the
estimated costs to sell, and are recorded in a valuation allowance. Subsequent
increases in fair value are only recognized to the extent that decreases in fair
value were recorded through the valuation allowance. Operating expenses for REO,
REO writedowns, and gains and losses on sale of REO are reported in the
statement of operations as real estate operations expense.
Income taxes
The Company files consolidated Federal and combined state income tax returns.
The Company accounts for income taxes under the asset and liability method. This
method requires that deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period the
change is enacted.
Restricted cash balances
Aggregate reserves in the form of deposits with the Federal Reserve Bank of
approximately $200,000 were maintained to satisfy federal regulatory
requirements at December 31, 1997.
F-10
<PAGE> 56
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Net Income (Loss) Per Share
Basic income (loss) per share is based on the number of common shares
outstanding, adjusted to reflect any stock splits and stock dividends during
each year. Diluted income (loss) per share includes the dilutive effect of the
issuance of any common stock equivalents. For the year ended December 31, 1997,
the basic and diluted income (loss) per share calculation is based upon
1,710,599 and 1,711,214 weighted averages shares respectively. For the years
ended December 31, 1996 and December 31, 1995, the weighted average shares for
both the basic and diluted income (loss) per share calculation were 1,710,214.
Recent Accounting Pronouncements
In August 1997, the FASB issued SFAS No. 128, Earnings Per Share. This statement
replaces the presentation of primary earnings per share with a presentation of
basic earnings per share. The statement also requires dual presentation of basic
and diluted earnings per share by entities with complex capital structures and
requires a reconciliation of the numerators and denominators between the two
calculations. SFAS No. 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. Management of
the Company does not believe the statements will have a material impact on the
Company s results of operations or financial position when adopted.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. This Statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. This statement requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This statement
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. SFAS
No. 130 is effective for the Company beginning January 1, 1998. Separate
disclosure of comprehensive income will be made. The impact on the Company of
adopting SFAS No. 130 is not expected to be material to the Company's existing
disclosure.
F-11
<PAGE> 57
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
NOTE 2- SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash paid during the year for
Interest $ 2,622,000 $ 2,511,000 $ 4,131,000
Income taxes (refunds
received) -- $ (522,285) --
Non-cash investing and financing
activities:
Real estate acquired
through foreclosure 3,182,000 2,054,000 4,309,000
Loans to facilitate
disposition of real estate 2,351,000 1,418,000 954,000
</TABLE>
F-12
<PAGE> 58
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3- SECURITIES HELD TO MATURITY
Securities held to maturity at December 31 are as follows:
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Obligations of U.S. and U.S.
government agencies $ 10,426,000 $ 81,000 $ (8,000) $ 10,499,000
Non-taxable municipal bonds 210,000 3,000 -- 213,000
Interest-bearing deposit 99,000 -- -- 99,000
------------ ------------ ------------ ------------
$ 10,735,000 $ 84,000 $ (8,000) $ 10,811,000
============ ============ ============ ============
1996
-----------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Obligations of U.S. and U.S.
government agencies $ 6,814,000 $ 18,000 $ (39,000) $ 6,793,000
Non-taxable municipal bonds 213,000 1,000 -- 214,000
Interest- bearing deposit 197,000 -- -- 197,000
------------ ------------ ------------ ------------
$ 7,224,000 $ 19,000 $ (39,000) $ 7,204,000
============ ============ ============ ============
</TABLE>
Taxable interest income on securities held to maturity totaled $666,000,
$435,000 and $525,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. Non-taxable interest income on securities held to maturity totaled
$14,000, $17,000 and $19,000 for the years ended December 31, 1997, 1996, 1995,
respectively.
F-13
<PAGE> 59
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3- SECURITIES HELD TO MATURITY (Continued)
Maturities of securities held to maturity at December 31, 1997 were as follows:
(dollars in thousands)
<TABLE>
<CAPTION>
After one year but After five years but
Within one year before five years before ten years
------------------- ------------------- --------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
--------- ------ --------- ------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Obligations of U.S. and
U.S. government
agencies $2,500 $2,499 $7,926 $8,000 -- --
Non-taxable municipal
bonds -- -- 210 213 -- --
Interest -bearing deposit 99 99 -- -- -- --
------ ------ ------ ------ ---------- --------
$2,599 $2,598 $8,136 $8,213 -- --
====== ====== ====== ====== ========== ========
</TABLE>
NOTE 4- LOANS RECEIVABLE, NET
The composition of the Company's loan portfolio at December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Real estate loans
Construction and development $3,258,000 $6,865,000
Mortgage 15,211,000 15,234,000
Commercial and industrial 49,126,000 50,564,000
Loans to individuals 3,156,000 2,435,000
All other loans 1,022,000 556,000
---------- ----------
71,773,000 75,654,000
Less:
Undisbursed loan funds 5,884,000 6,765,000
Allowance for loan losses 1,072,000 1,260,000
----------- -----------
$64,817,000 $67,629,000
=========== ===========
</TABLE>
F-14
<PAGE> 60
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4- LOANS RECEIVABLE, NET (continued)
The unamortized balance of deferred loan origination, commitment and other fees
(net of related direct lending costs), totaling $349,000 and $352,000 as of
December 31, 1997 and 1996, are treated above as a reduction of the applicable
loan balances.
The balance of loans on non-accrual was approximately $781,000 and $1,424,000 at
December 31, 1997 and 1996, respectively. Interest income foregone on
non-accrual loans approximated $94,000 in 1997, $135,000 in 1996 and $108,000 in
1995. Interest income recognized on non-accrual loans was approximately $145,000
in 1997, $51,000 in 1996 and $114,000 in 1995.
At December 31, 1997 and 1996, the Company's total recorded investment in
impaired loans was $4.6 million and $3.7 million, respectively. At December 31,
1997, $4.6 million of the impaired loans, had a specific allowance for loan
losses in the amount of $0.5 million. At December 31, 1996, $2.6 million of the
$3.7 million in impaired loans had a specific allowance for loan losses in the
amount of $0.5 million. Of the $4.6 million of impaired loans at December 31,
1997, $3.5 million was represented by three loans, which accounted for $0.3
million of the specific allowance for loan losses at December 31, 1997. The
average recorded investment in impaired loans for the years ended December 31,
1997 and 1996 were $4.4 million and $1.7 million, respectively. The related
amount of interest income recognized during the period that such loans were
impaired was $0.5 million for the year 1997, $0.1 million for the year ended
1996 and $0.1 million for the year ended 1995.
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $ 1,260,000 $ 1,510,000 $ 1,613,000
Provision 1,242,000 886,000 1,104,000
Sale of Business Credit loans -- -- (550,000)
Charge-offs (1,599,000) (1,159,000) (715,000)
Recoveries 169,000 23,000 58,000
----------- ----------- -----------
Balances at end of year $ 1,072,000 $ 1,260,000 $ 1,510,000
=========== =========== ===========
</TABLE>
The Company is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
balance sheets. The contract or notional amounts of those instruments reflect
the extent of involvement the Company has in particular classes of financial
instruments.
F-15
<PAGE> 61
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4- LOANS RECEIVABLE, NET (continued)
Included in loans outstanding at December 31, 1997 and December 31, 1996 was
$1,553,000 and $2,028,000 of the guaranteed portion of SBA loans. The
unguaranteed portion of SBA loans were $3,166,000 and $2,230,000 at December 31,
1997 and 1996, respectively. At December 31, 1997 and December 31, 1996 the Bank
serviced for others $9,131,000 and $7,068,000 of SBA loans, respectively.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amounts of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. The contract or
notional amounts of forward contacts do not represent exposure to credit loss.
Commitments to extend credit at December 31, 1997 and 1996 primarily consisting
of undisbursed loan commitments were $5,884,000 and $8,181,000, respectively.
Standby letters of credit at December 31, 1997 and 1996 totaled approximately
$145,000 and $255,000, respectively. At December 31, 1997 all of the standby
letters of credit were collateralized, and at December 31, 1996, $41,000 were
unsecured and $214,000 collateralized. Standby letters of credit are conditional
commitments issued by the Company to guarantee the performance of a customer to
a third party. Those guarantees are primarily issued to support private
borrowing arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
Where appropriate, cash or other security support is held as collateral.
The Company grants real estate, commercial and industrial loans to customers
located within Southern California. Although the Company has a diversified loan
portfolio, a substantial portion of its debtors' ability to honor their
contracts is dependent upon the real estate development and construction market
sector and general economic conditions within Southern California.
NOTE 5- DISCONTINUED OPERATIONS
As a result of continued losses from operations, higher interest rates and the
generally poor market for residential mortgage loans, the Company, in the fourth
quarter of 1994, discontinued its mortgage banking operations which were
primarily carried out by its wholly owned subsidiary, BSC. All revenues and
expenses, net of income tax effect, attributable to mortgage banking operations
are included in the accompanying statements of operations under the caption
"Loss from discontinued operations, net of taxes".
During 1995, the Company settled a dispute over a repurchase liability relating
to mortgage loans originated by BSC. As a result of this settlement the Company
significantly reduced its exposure to future repurchase liability, however, an
additional $2.1 million charge, excluding income tax benefit, was incurred,
representing substantially all of the loss from discontinued operations for
1995.
F-16
<PAGE> 62
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - DISCONTINUED OPERATIONS (continued)
Summarized operating data for the discontinued mortgage banking operations in
1995 are as follows:
1995
-------
Loss on sale of mortgage loans $ (3)
Service fee expense (7)
Net interest expense (120)
Other income 42
-------
(88)
Salaries, wages and benefits --
Real estate operations, net 12
Other expenses 2,108
-------
2,120
-------
Loss before taxes (2,208)
Income tax benefit (284)
-------
Net loss $(1,924)
=======
Included in other liabilities in the accompanying balance sheets for 1997 and
1996, respectively, is a $0.1 million and $0.4 million allowance for losses on
loan repurchases. In determining the amount of this allowance the Company
considered its past experience with repurchases, the potential for further
repurchases and the related losses. While management believes that the balance
of this allowance at December 31, 1997 is adequate to provide for exposure to
losses on loan repurchases, future additions to the allowance may be necessary
as a result of changes in the aforementioned factors.
NOTE 6 - REAL ESTATE HELD FOR SALE
Real estate held for sale at December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Acquired through foreclosure $1,883,000 $2,869,000
Valuation allowance (103,000) (120,000)
---------- ----------
$1,780,000 $2,749,000
========== ==========
</TABLE>
F-17
<PAGE> 63
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1997, 1996, 1995, real estate operations, net
was comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- -----------
<S> <C> <C> <C>
Net gain (loss) on sale of real estate $ 136,000 $(196,000) $ (17,000)
Provision for losses (580,000) (193,000) (2,424,000)
Other valuation adjustments
charged to operations -- -- (201,000)
Other holding costs (71,000) (367,000) (75,000)
--------- --------- -----------
Real estate operations, net $(515,000) $(756,000) $(2,717,000)
========= ========= ===========
</TABLE>
Activity in the allowance for real estate losses is a follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year $ 120,000 $ 1,100,000 $ 218,000
Provision for losses 580,000 193,000 2,424,000
Charge-offs (597,000) (1,173,000) (1,542,000)
---------- ----------- -----------
Balance at end of year $ 103,000 $ 120,000 $ 1,100,000
========== =========== ===========
</TABLE>
NOTE 7 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to certain
officers, directors and the companies with which they are associated. In
management's opinion such loans are within applicable regulatory bank lending
limitations. Such loans were made on substantially the same terms, including
interest rates and collateral as those prevailing at the time for comparable
transactions with other persons who were not executive officers or directors and
did not involve more than the normal risk of collectibility or present other
unfavorable features. The following is an analysis of the activity of all such
loans during 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Balance at beginning of year $ 1,730,000 $ 2,225,000
New loans granted, including renewals 167,000 4,000
Repayments (247,000) (499,000)
----------- -----------
Balance at end of year $ 1,650,000 $ 1,730,000
=========== ===========
</TABLE>
F-18
<PAGE> 64
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - NOTES PAYABLE
In June of 1997, the Company issued $900,000 of unsecured promissory notes to
certain Directors of the Company. The proceeds of these notes were used by the
Company to reimburse the Bank for a tax receivable from the Company. It was
determined during a recent Federal Deposit Insurance Corporation and State
Banking Department joint regulatory examination, that a net tax balance on the
Bank's books is a functional receivable from the Company, and should be repaid.
This balance resulted from the filing of consolidated tax returns of the
Company, under an agreement, with its subsidiaries, which has been in effect for
many years.
The notes bear interest at an initial rate of 10% per annum, but the interest
rate may fluctuate depending upon increases or decreases in the loan's interest
rate of 1.5% in excess of Bank of America's prime rate in effect from time to
time. These promissory notes have a maturity of September 18, 1997, with
automatic 90 day renewals, subject to renewal at the option of the Company for a
maximum period of up to one year, unless a change is requested by the note
holder.
At December 31, 1997 the Company had $400,000 of promissory notes outstanding
issued to certain Directors of the Company.
The maximum amounts of short-term borrowings at any month end during 1997 and
1996 were $0.9 million and $0.4 million, respectively. The average amounts
outstanding during 1997 and 1996 were $0.4 million and $0.4 million,
respectively, and the weighted average interest rates thereon during 1996 and
1995 were 10.00% and 9.93%, respectively.
F-19
<PAGE> 65
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES
The provision for income taxes from continuing operations is a follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- ----------
<S> <C> <C>
Current
Federal $412,000 -- $ (927,000)
State $2,000 $ 3,000 - -
-------- --------- ----------
$414,000 $ 3,000 (927,000)
Deferred
Federal (603,000) 131,000 655,000
State 24,000 181,000 --
-------- --------- ----------
(579,000) 312,000 655,000
Increase (decrease) in
valuation allowance on
deferred tax assets 479,000 (312,000) 1,201,000
-------- --------- ----------
$314,000 $ 3,000 $ 929,000
======== ========= ==========
</TABLE>
Current income taxes receivable of $117,000, are included in Other assets at
December 31, 1997 and 1996.
As a result of the following items, total income tax expense was different from
the amount computed by applying the statutory U.S. income tax rate of 34%.
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ----------
<S> <C> <C> <C>
Federal income
tax expense (benefit)
at statutory rate $(194,000) $ 118,000 $ (199,000)
Increase (decrease) in valuation
allowance on deferred tax assets 479,000 (312,000) 1,201,000
State tax, net of federal benefit 17,000 184,000 63,000
Other 12,000 13,000 (136,000)
--------- ---------- ----------
$ 314,000 $ 3,000 $ 929,000
========= ========== ==========
</TABLE>
F-20
<PAGE> 66
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES (Continued)
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities which are included in other assets on
the accompanying balance sheet at December 31, 1997 and 1996 are presented
below. The amounts as of December 31, 1996 have been adjusted to reflect the tax
return actually filed.
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance
for loan losses $ 5,000 $ 69,000
Allowance for potential
loan repurchase 41,000 147,000
Deferred loan fees 143,000 144,000
Real estate valuation allowances 42,000 131,000
Net operating loss carryforwards 1,593,000 699,000
Other 158,000 100,000
---------- ----------
Total gross deferred tax assets 1,982,000 1,290,000
less: valuation allowance 1,564,000 1,085,000
---------- ----------
Net deferred tax assets 418,000 205,000
Deferred tax liabilities:
Depreciation 200,000 200,000
Other 118,000 5,000
---------- ----------
Total gross deferred tax liabilities 318,000 205,000
---------- ----------
Net deferred tax assets $ 100,000 $ 0
========== ==========
</TABLE>
During 1997 the valuation allowance on gross deferred tax assets increased by
$479,000 from $1,085,000 at December 31, 1996 to $1,564,000 at December 31,
1997. The Bank has approximately $4,797,000 of net operating loss carryforward
available for California Franchise Tax purposes. This carryforward expires
between 1998 and 2002. Additionally, the Bank has approximately $3,675,000 of
net operating loss carryforward available for Federal Income Tax purposes. This
carryforward expires in 2012. The current federal income tax expense of $412,000
is a result of a disallowance, for federal income tax purposes, of an operating
loss carryback claim resulting in additional net operating loss carryforwards.
F-21
<PAGE> 67
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - INCOME TAXES (Continued)
In determining the possible realization of deferred tax assets, SFAS No. 109
requires that future taxable income from the following sources be taken into
account: (a) the reversal of taxable temporary differences , (b) future
operations exclusive of temporary differences and (c) tax planning strategies
that if necessary, would be implemented to accelerate taxable income into years
in which net operating losses might otherwise expire. Management believes that
it is more likely than not that the Company will realize the tax benefits from
$100,000 deferred tax assets because of expected future profitability, which
includes anticipated gains on sale of SBA loans..
NOTE 10- COMMITMENTS AND CONTINGENCIES
The Company leases facilities under non-cancellable operating leases. The
minimum annual rental payments (excluding property taxes and insurance) for the
following periods are approximately:
<TABLE>
<CAPTION>
Year Amount
---- ----------
<S> <C>
1998 $ 564,000
1999 496,000
2000 425,000
2001 425,000
2002 425,000
2003 and thereafter 1,027,000
==========
$3,362,000
==========
</TABLE>
The minimum annual rental payments which are included in the above schedule are
for existing lease obligations and are not a forecast of future rental expense.
Total rent expense for 1997, 1996 and 1995 was approximately $597,000, $593,000
and $580,000, respectively.
The Company has employment agreements with certain of its executives which
expire through 1998. In addition to a base salary, the agreements provide for
incentive compensation at the Discretion of the Company (or subsidiary
applicable to the individual employee). No incentive compensation was paid for
the periods ending December 31, 1997 and 1996.
The Company, BSC, Bank and Business Credit are involved in various legal
proceedings and litigation in the normal course of their business. While no
assurance can be given as to the likelihood of an unfavorable outcome of any
such litigation or the estimated amount of potential loss, if any, based upon
currently available information, the Company does not believe that the outcome
of such litigation will have a material adverse effect on the results of
operations or financial condition of the Company.
F-22
<PAGE> 68
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11- REGULATORY MATTERS
In November 1995, the Federal Reserve Bank and the Board of
Directors of the Company entered into a memorandum of understanding (the "FRB
Memorandum"). It was determined subsequent to December 31, 1997, the Company was
not in compliance with the FRB Memorandum at December 31, 1997, due to the
Bank's lack of compliance with the capital ratio of 6.75% required under the
terms of the Joint Memorandum discussed below. The Bank's Tier 1 capital was
6.42% of average total assets at December 31, 1997. The Company and the Bank's
failure to comply with the terms of the FRB Memorandum could result in further
regulatory action by the Federal Reserve Bank.
As a result of joint examinations of the Bank in 1997, the FDIC and
the DFI proposed that the Board of Directors of the Bank enter into a memorandum
of understanding which would replace and supersede the provisions of any prior
memorandums of understanding. In November 1997, the FDIC, the DFI and the Board
of Directors of the Bank entered into a joint memorandum of understanding with
each of the FDIC and the DFI (the "Joint Memorandum"). Under the Joint
Memorandum, the Bank is required, among other things, to achieve and maintain
Tier 1 capital equal to or above 6.75% of total assets; the Bank shall have and
retain qualified management; establish and maintain an adequate allowance for
loan losses; and not pay cash dividends without the prior written consent of
both the FDIC and the DFI.
At December 31, 1997, the Bank was out of compliance with the
capital ratio of 6.75% required under the terms of the Joint Memorandum. It was
determined subsequent to December 31, 1997 that approximately $412,000 of an
operating loss carryback claim would be disallowed for federal income tax
purposes, resulting in additional income tax provision for the year ended
December 31, 1997. See "Note 9 to Consolidated Financial Statements". Management
believes that compliance with the capital requirement will be met by March 31,
1998 through a combination of earnings and a reduction in average assets.
However, the failure to comply with the terms of the Joint Memorandum could
result in regulatory action.
Under the FRB Memorandum, the Company is required, among other things, to
comply with the Joint Memorandum; ensure that it has sufficient cash to pay its
expenses and to service its debt; the Company may not, directly or indirectly,
acquire or sell any interest in any entity, line of business, problem loans or
other assets, without the prior written approval of the Federal Reserve Bank;
and to not pay cash dividends without the prior written consent of the Federal
Reserve Bank.
On December 19, 1992 the federal regulations implementing prompt
corrective action provisions of the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") became effective. Those regulations provide
for certain mandatory and discretionary action by federal agencies based upon an
institution's ranking within five capital levels -- well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and critically
undercapitalized.
F-23
<PAGE> 69
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - REGULATORY MATTERS (continued)
All undercapitalized institutions are required to file a capital restoration
plan and undergo close monitoring of their condition, and are subject to
restrictions on operations requiring regulatory approval. Significantly
undercapitalized or critically undercapitalized institutions and
undercapitalized institutions which fail to implement an acceptable capital plan
are subject to more severe actions which may include divestiture of subsidiaries
and replacement of senior management and directors. At December 31, 1997 the
Bank's capital ratios were not sufficient to be considered adequately
capitalized as defined under FDICIA.
The following table sets forth the capital ratios of the Company and the Bank at
December 31, 1997 (dollars in thousands).
<TABLE>
<CAPTION>
Company Bank
------------------- --------------------
Amount Ratio Amount Ratio
--------- ------- ----------- --------
<S> <C> <C> <C> <C>
Tier 1 capital $ 6,386 8.91% $ 6,593 9.77%
Tier 1 capital
minimum requirements 2,867 4.00% 2,867 4.00%
--------- ---- --------- ------
Excess $ 3,519 4.91% 3,726 5.77%
Total capital $ 7,285 10.16% 7,491 10.45%
Total capital
minimum requirement 5,735 8.00% 5,733 8.00%
--------- ---- --------- ------
Excess $ 1,550 2.16% $ 1,758 2.45%
Risk-weighted
assets $ 71,686 $ 71,667
Tier 1 capital $ 6,386 6.21% $ 6,593 6.42%
Tier 1 capital
Minimum requirement 4,111 4.00%
--------- -----
Memorandum requirement 6,931 6.75%
-------- ------
Excess (deficiency) $ 2,275 2.21% (338) (0.33)%
Total average assets $102,771 $102,684
</TABLE>
The leverage ratio consists of tangible Tier 1 capital divided by total average
assets. As of December 31, 1997, the Company and the Bank had leverage ratios of
6.21% and 6.42%, respectively. Regulators have established a minimum leverage
ratio of 4.0% for the highest rated banks. However, institutions experiencing or
anticipating significant growth, or those with other than minimum risk profiles,
will be expected to maintain capital well above the minimum. The Bank is
required under the terms of the Joint Memorandum to maintain a minimum leverage
ratio of 6.75%.
F-24
<PAGE> 70
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12- FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the value of
financial instruments. Because no active market exists for a significant portion
of the Company's loan portfolio, fair value estimates are based on subjective
judgments regarding credit risk, future economic conditions and other risk
characteristics which cannot be determined with precision. The fair value
disclosed does not reflect any gain or loss that could result from offering the
instruments for sale. Potential taxes and other expenses that would be incurred
in an actual sale or settlement are not reflected in amounts disclosed.
Cash and cash equivalents
The carrying value of cash and cash equivalents is assumed to be a reasonable
estimate of fair value.
Securities
Fair values of securities held to maturity and are based on quoted market
prices.
Loans
Fair value of loans are estimated for portfolios of loans with similar financial
characteristics. Each loan portfolio was further segmented into fixed and
adjustable rate and performing and non-performing categories. The fair value of
performing loans was calculated by discounting estimated cash flows through the
estimated maturity using estimated current replacement discount rates that
reflect the credit and interest rate risk inherent in the loans. Fair value for
nonperforming loans was based on the lower of recent external appraisals and
internal value estimates and related estimated cash flows discounted using a
rate commensurate with the risk associated with the estimated cash flows. Credit
risk and cash flows are estimated using available market information and
specific borrower information.
Deposits
The fair value of demand, savings, now and money market deposits is the amount
payable on demand at the reporting date. The fair value of fixed maturity time
deposits is estimated using the rates currently offered for deposits of similar
remaining maturities. No benefit has been ascribed to core deposit intangibles.
Notes payable
Rates currently available to the Company for credit with similar terms are used
to estimate fair value of existing debt.
Undisbursed loans and standby letters of credit
The fair value of undisbursed loans and standby letters of credit is estimated
to be equal to the fees charged by the Bank as these are the same as replacement
rates and fees currently charged to enter into similar agreements. No disclosure
is provided as amounts are minor.
F-25
<PAGE> 71
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The estimated fair values of the Company's financial instruments at December 31,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash
equivalents $21,836,000 $21,836,000 $24,322,000 $24,322,000
Investment securities 10,735,000 10,811,000 7,224,000 7,204,000
Loans, net 64,817,000 64,245,000 67,629,000 66,434,000
Financial liabilities:
Fixed rate term
Deposits 8,613,000 8,613,000 $7,081,000 $6,998,000
Other deposits 85,461,000 85,461,000 89,105,000 89,105,000
Notes payable 400,000 400,000 -- --
</TABLE>
NOTE 13 - STOCKHOLDERS' EQUITY
Stock ownership plan - In 1986, the Company adopted a non-contributory
non-leveraged employee stock ownership plan (Stock Plan) to provide benefits to
all eligible employees upon termination of employment. The Stock Plan invests
primarily in Company stock. Equivalent full-time employees as defined by the
Stock Plan became participants in the Stock Plan after completing three months
of service with the Company. Participant accounts vest in increments over a
seven year period of service at which time full vesting occurs.
The Company's contributions may be made in cash or common stock of the Company
and are determined annually by the Board of Directors in their sole discretion.
The Company made a contribution of $8,000 in 1997 and 1996 and no contribution
in 1995. At December 31, 1997, the Stock Plan held 59,543 shares of common stock
of the Company.
The Company had a stock option plan which expired in 1992. As of December 31,
1997 there were 16,826 shares exercisable which had been granted under the old
plan. The exercise prices range from $4.32 to $5.36 (weighted average of $4.64)
with options expiring in the year 2001. During 1997, a total of 2,205 shares
were exercised at a price of $4.99 per share.
F-26
<PAGE> 72
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCKHOLDERS' EQUITY (continued)
Dividends restrictions
Section 23A of the Federal Reserve Act restricts the Bank from making loans or
advances to the Company and its affiliates in excess of 20% of its capital stock
and surplus. The prompt corrective action provisions of FDICIA prohibit the Bank
from making a capital distribution to the Company if, after such a transaction,
the Bank would be undercapitalized. In addition, California Banking law limits
the amount of dividends which a bank can pay without obtaining prior approval
from bank regulators. At December 31, 1997, these provisions would allow the
Bank to make loans of approximately $1.4 million to the Company and its
affiliates. No dividends would be permitted without regulatory approval. In
addition, under an agreement with the Federal Reserve Bank of San Francisco
("FRB") the Company is prohibited from paying dividends to shareholders without
the prior written approval of the FDIC. Under the terms of the Joint Memorandum
and the FRB Memorandum , the Bank is prohibited from paying cash dividends to
the Company unless the payment is approved in advance by the Regional Director
of the FDIC and the Commissioner, as well as the Federal Reserve Bank,
respectively. Additionally, under the prompt corrective action provisions of
FDICIA, the Bank is prohibited from paying any cash dividends that will result
in the Bank becoming undercapitalized. No dividend was paid by the Bank to the
Company in 1995, 1996 or 1997.
Subsequent Events:
On December 30, 1997, the Company, the Bank and The Pacific Bank, a
national association ("Pacific"), entered into a definitive Agreement and Plan
of Reorganization (the "Reorganization Agreement"). The Reorganization Agreement
provides for, among other things, the merger of a subsidiary corporation to be
organized by Pacific with and into the Company, immediately followed by the
merger of the Company with and into the Bank, immediately followed by the merger
of the Bank with and into Pacific (collectively, the "Merger"). The Merger is
subject to, among other customary conditions to closing, the receipt of
regulatory approvals and the approval of the shareholders of the Company and the
shareholders of Pacific. The Company has scheduled a shareholders' meeting to
consider the Merger on May 27, 1998.
Under the terms of the Reorganization Agreement, the Company's
shareholders will receive aggregate consideration for their shares of the
Company equal to one hundred seventy-five percent (175%) of the consolidated
book value of the Company, as determined in accordance with generally accepted
accounting principles, within three calendar days preceding the proposed
effective date of the Merger. Such amount is subject to certain adjustments set
forth in the definitive Reorganization Agreement.
The foregoing description of the terms of the Reorganization
Agreement does not purport to be a complete statement of the parties' rights and
obligations thereunder, and is qualified in its entirety by reference to the
definitive Reorganization Agreement, a copy of which is contained in the
Company's Report on Form 8-K filed on January 23, 1998.
F-27
<PAGE> 73
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - OTHER NONINTEREST EXPENSE/INCOME
Other noninterest expense is comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Professional fees $ 428,000 $ 465,000 $ 827,000
Office supplies and expense 125,000 153,000 157,000
Communication 286,000 270,000 265,000
Insurance 86,000 89,000 259,000
FDIC & DFI Assessments 89,000 204,000 266,000
Directors fees 85,000 77,000 128,000
Data processing fees 232,000 202,000 30,000
Other 629,000 511,000 381,000
---------- ---------- -----------
$1,960,000 $1,971,000 $ 2,313,000
========== ========== ===========
</TABLE>
Included in Other non-interest income for the year ended December 31, 1996 is
approximately $850,000 of income from (i) the reversal of various accrued
liabilities which were deemed no longer necessary, and (ii) the settlement of
certain litigation .
NOTE 15 - OCCUPANCY EXPENSE
Occupancy expense is comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Leasehold amortization $ 76,000 $ 74,000 $ 77,000
Utilities 40,000 40,000 45,000
Insurance bank premises 27,000 35,000 46,000
Rent bank premises 597,000 593,000 580,000
Depreciation - Vault equipment 5,000 5,000 5,000
Other 90,000 83,000 88,000
-------- -------- --------
$835,000 $830,000 $841,000
======== ======== ========
</TABLE>
F-28
<PAGE> 74
Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
------- --------
<S> <C> <C>
Assets
Cash in Sterling Bank $ 228 $ 69
Investment in Sterling Bank 6,593 7,500
Investment in non-bank subsidiary -- 411
Loans receivable 41 --
Other assets -- 22
------- -------
$ 6,862 $ 8,002
======= =======
Liabilities and Stockholder' Equity
Notes payable $ 400 --
Other liabilities 76 $ 740
Common stock 8,697 8,686
Accumulated deficit (2,311) (1,424)
------- -------
$ 6,862 $ 8,002
======= =======
</TABLE>
Payment of dividends is subject to statutory and regulatory limitations. As a
result of losses, at December 31, 1997, the Bank had no retained earnings
legally available for the payment of cash dividends.
F-29
<PAGE> 75
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (Continued)
STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Equity in net income (loss) of subsidiaries $(907) $ 329 $(3,428)
Other income 187 204 458
Other expenses (165) (189) (474)
----- ----- -------
Income (loss) before taxes (885) 344 (3,444)
Income tax provision (benefit) 1 1 (5)
----- ------ -------
Net Income (loss) $(886) $ 343 $(3,439)
===== ====== =======
</TABLE>
F-30
<PAGE> 76
Sterling West Bancorp and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16- CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY (Continued)
STERLING WEST BANCORP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(dollars in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (886) $ 343 $(3,439)
Adjustments to reconcile net income to
net cash from operating activities:
Equity in (income) loss of subsidiaries 907 (329) 3,428
Dividends paid by non-bank subsidiary 51 -- 4,100
Other, net (324) 17 (253)
------- ------- -------
Total adjustments 634 (312) 7,275
------- ------- -------
Net cash provided by operating activities (252) 31 3,836
Cash from investing activities:
Payment for investment in bank subsidiary -- -- (3,650)
------- ------- -------
Net cash used in investing activities -- -- (3,650)
------- ------- -------
Cash flows from financing activities:
Proceeds issuance of notes payable 900 -- --
Repayment of notes payable (500)
Proceeds from exercise of stock options 11 -- --
Payments of commercial paper -- -- (1,493)
Decrease in loan to subsidiary -- -- 1,339
------- ------- -------
Net cash provided by (used in) financing activities 411 -- (154)
------- ------- -------
Net increase in cash and cash equivalents 159 31 32
Cash and cash equivalents at beginning of year 69 38 6
------- ------- -------
Cash and cash equivalents at end of year $ 228 $ 69 $ 38
======= ======= =======
Supplemental cash flow information
Cash paid during the year for interest $ 38 -- $ 152
Cash paid for income taxes -- -- --
</TABLE>
F-31
<PAGE> 77
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
3.1 Articles of Company (1)
3.1.1 Certificates of Amendment to Articles (8)
3.2.1 Bylaws of Company, as amended (2)
10.1-10.3 RESERVED
10.4 Lease, dated June 2, 1980, between
Wilshire-Berendo Building Company, a
Limited Partnership, and Sterling Bank
and Lease amendment, effective
July 30, 1981 (1)
10.5 Company's 1982 Stock Option plan, as
amended (5)
10.6 Sterling Bancorporation Employee
Stock Ownership Plan and Trust (3)
10.6.1 Amended and Restated Sterling West Bancorp
Employee Stock Ownership Plan and Trust (9)
10.7-10.14 RESERVED
10.15 Sublease, dated October 25, 1989, between
Jaffe & Clemens and Sterling Bank (4)
10.16-10.19 RESERVED
</TABLE>
<PAGE> 78
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
10.19.4 Employment Agreement dated January 3, 1998 between
Sterling West Bancorp and Allan E. Dalshaug
10.20 RESERVED
10.21.2 Employment Agreement, dated January 1, 1994,
between Sterling Bank and Joseph Carona (6)
10.21.3 Employment Agreement dated January 1, 1998 between
Sterling Bank and Joseph Carona
10.23-10.25 RESERVED
10.29 Sublease, dated February 2, 1994, between
Wells Fargo Bank, N.A. and Sterling Bank (9)
10.30 Lease, dated May 12, 1994, between The Yashouafars,
A General Partnership, and Sterling Bank (9)
10.31 Employment Agreement, dated March 21, 1996,
between the Company and Allan E. Dalshaug (10)
10.32 Form of Promissory Note dated June 20, 1997 between
the Company and each of Messrs. Behunin, Wagner,
Dalshaug, Borris and Schiller, directors of the Company
21 Subsidiaries of Company (7)
23.1 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
</TABLE>
<PAGE> 79
EXHIBIT INDEX (CONTINUED)
(1) These documents were previously filed as Exhibits 3.1 and 10.4,
respectively, to the Company's Registration Statement on Form S-14
(registration No.2-77211), effective June 1, 1982, and are
incorporated herein by this reference.
(2) This document was previously filed as Exhibit 3.2.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1990, and is incorporated herein by this reference.
(3) This document was previously filed as Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1986, and is incorporated herein by this reference.
(4) This document was previously filed as Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1989, and is incorporated herein by this reference.
(5) This document was previously filed as Exhibit 10.5 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1988, and is incorporated herein by this reference.
(6) This document was previously filed as Exhibit 10.21.2 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993, and is incorporated herein by this reference.
(7) This document was previously filed as Exhibit 22 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1984, and is incorporated herein by this reference.
(8) This document was previously filed as Exhibit 3.1.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1992, and is incorporated herein by this reference.
(9) These documents were previously filed as Exhibits 10.6.1, 10.29, and
10.30, respectively, to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994, and are incorporated herein
by this reference.
(10) This document was previously filed as Exhibit 10.31 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1995, and is incorporated herein by reference.
<PAGE> 80
EXHIBIT 10.19.4
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered
into effective as of JANUARY 3, 1998 by and between STERLING WEST BANCORP, a
California corporation, hereinafter referred to as the "Employer," and ALLAN E.
DALSHAUG, hereinafter referred to as the "Employee."
The parties contract with reference to the following facts:
A. The Employer desires to appoint and employ the Employee in the
capacities of Chairman of the Board of Directors, Chief Executive Officer and
President of the Employer, and the Employee desires to accept such appointment
and employment with the Employer.
B. The parties are willing to enter into an agreement providing
for such appointment and employment upon the terms and conditions hereinafter
set forth.
NOW, THEREFORE, in consideration of the mutual promises contained
herein, the parties agree as follows:
1. EMPLOYMENT. The Employer hereby agrees to appoint and
employ, and does hereby appoint and employ, the Employee as its Chairman, Chief
Executive Officer and President for and during the Employment Period (as defined
in Section 5 herein), and the Employee agrees to accept and hereby accepts such
appointment and employment by the Employer, on the terms and subject to the
conditions set forth in this Agreement.
2. COMPENSATION.
2.1 Salary. As compensation for the services to be rendered
by the Employee, hereunder, the Employer agrees to pay to the Employee during
the Employment Period a salary at the rate of One Hundred and Sixty-Six Thousand
Five Hundred Dollars ($166,500) per year, subject to applicable law respecting
withholding of federal, state and/or local taxes or their equivalent. All
salary, less income tax and other applicable withholding, shall be prorated and
paid out periodically in accordance with the Employer's normal payroll
procedures with respect to executive officers.
2.2 Incentive Compensation. In addition to the salary
provided for in Section 2.1 above, the Employee may receive, during the
Employment Period, such incentive compensation as the Board of Directors of the
Employer (the "Board") may, in its sole and absolute discretion, determine to
pay to the Employee from time to time, in a form and in an amount to be
determined solely by the Board. However, the Board is under no obligation to
provide for any such incentive compensation.
<PAGE> 81
3. DUTIES, TIME AND EFFORTS.
3.1 Duties. During the Employment Period, the Employee shall
serve as Chairman of the Board, Chief Executive Officer and President of the
Employer and shall report to the Board, and his duties shall include generally,
but without limitation, authority and responsibility for the overall management
of the affairs and business of the Employer, serving as Chairman of the Board
and Chief Executive Officer of Sterling Bank, serving as Chairman of the Board
and Chief Executive Officer of Sterling Business Credit, Inc., and such
additional duties as may be assigned by the Board to the Employee. It is
specifically understood that the Employee may be required to provide services to
other subsidiaries of the Employer not presently in existence or for businesses
not presently conducted by the Employer, consistent with his status as an
executive officer.
3.2 Time. The Employee shall devote his full productive time,
energies, and abilities to the proper and efficient performance of the duties,
responsibilities and authorities described above. However, the expenditure of
reasonable amounts of time by the Employee for educational, charitable and
professional activities that do not otherwise conflict with the terms of this
Agreement or the duties and responsibilities of the Employee, including without
limitation, serving as a member of the Board of Directors of L.A. Gear, Inc. and
Jalate, Ltd. (or related companies), shall not be deemed a breach of this
Agreement, provided that such activities do not materially interfere with the
services required of the Employee under this Agreement, and shall not require
the prior consent of the Employer.
3.3 Non-Competition. During the Employment Period, the
Employee may not, without the prior express authorization of the Board, directly
or indirectly engage in any activity competitive with the Employees businesses
or those of any of its subsidiaries, whether acting alone or as an officer,
director, owner or employee of any other corporation or business, whether
professional or otherwise. Nothing contained in this Section 3.3, however, shall
prevent the Employee from purchasing and/or holding less than one-tenth of one
percent (0.10%) of the issued and outstanding stock of a publicly-held
corporation.
3.4 Other. The Employee shall, at all times during the
Employment Period, be furnished with such office, stenographic and other
necessary and secretarial assistance, and such facilities, amenities and
services as are suitable to the Employee's position as an executive officer and
adequate for the performance of the Employee's duties under this Agreement.
Unless otherwise agreed to by the Employee, the Employee's offices shall be
maintained at the premises of the principal place of business of the Employer in
Los Angeles, California; provided, however, that in connection with the
performance of his duties and responsibilities, the Employee acknowledges that
he may be required to undertake significant travel as the needs of his position
may reasonably require.
<PAGE> 82
4. VACATION. The Employee shall be entitled to take vacation
at the rate of five (5) weeks during each twelve (12) month period during the
Employment Period. The date or dates of said vacation shall be determined by the
Employee and the Board. To the extent the Employee does not use the full amount
of such vacation as provided above, the unused balance, up to a maximum of one
(1) week, shall accrue and be carried over into the following year, if any,
during which the Employee is employed by the Employer. Under no circumstances,
regardless of the Employee's failure to take vacations, may the Employee take
more than six (6) weeks vacation during any twelve (12) month period. In the
event Employee is terminated for any reason, he shall be entitled to receive
cash for any accrued but unused vacation time.
5. TERM.
5.1 Term. The term of the Employee's employment and the
Employer's obligations pursuant to this Agreement shall continence upon the date
of this Agreement and terminate on January 2, 1999, unless sooner extended by
agreement between the parties or sooner terminated upon the happening of any of
the following events (the "Employment Period"):
(a) If the Employer and the Employee shall mutually agree
to such sooner termination;
(b) Conviction of the Employee for any crime involving a
dishonest act or any behavior not befitting the Employee's position as an
executive officer of a bank or bank holding company, which could reasonably make
the continued employment of the Employee by the Employer damaging to the
Employer or its public reputation;
(c) Death of the Employee;
(d) The Employee is prevented, by reason of any accident,
illness, or mental or physical disability, not arising out of an injury
sustained while on the Employer's business, from fully performing his duties and
responsibilities under this Agreement for a period of ninety (90) consecutive
days or an aggregate of ninety (90) days during any three hundred and sixty-five
(365) day period (not limited to any calendar or fiscal year).
(e) Commission of any dishonest or fraudulent act by the
Employee in the course of his employment;
(f) For Good Cause, as defined in Section 5.2 below, and
pursuant to the procedures described therein and in Section 5.3;
(g) Due to governmental restrictions on continued
operations of the Employer or its banking subsidiary, as more fully set forth
and provided for in Section 5.4 herein.; or
(h) At Employer's sole option, exercisable at any time
upon (30) days written notice.
<PAGE> 83
5.2 Termination for Good Cause After Notice and Failure to
Cure. The Employer may, at any time during theEmployment Period, terminate the
employment of the Employee and its obligations under this Agreement for good
cause, by written notice to the Employee in accordance with the notice
requirements and restrictions contained in Section 5.3 herein. For purposes of
illustration, good cause shall include, but shall not be limited to, the
following (collectively, "Good Cause"):
(a) The persistent unwillingness or inability of the
Employee to perform his duties or responsibilities hereunder;
(b) The persistent malfeasance, misfeasance or
nonfeasance in connection with the performance of the Employee's duties, such
conduct to be determined solely by the Employer;
(c) Willful and intentional acts having the effect or
consequence of injuring the reputation, business or business relationships of
the Employer;
(d) Breach of any material provision of this Agreement.
Notwithstanding the foregoing, however, Good Cause shall not exist solely due to
the financial performance or results of operation of the Employer.
5.3 Notice Requirement and Restrictions. Prior to terminating
the Employee's employment pursuant to Sections 5.1 (f) or 5.2 herein, the
Employer shall provide the Employee with a written notice specifying in
reasonable detail (i) the duties or responsibilities which it contends that the
Employee has not been adequately performing, (ii) why the Employer believes that
it has good cause to terminate the Employee's employment and (iii) what actions
the Employee should perform to adequately execute his obligations under this
Agreement. If the Employee corrects such performance failure within thirty (30)
days of receipt of such notice or otherwise modifies his performance to correct
the matters indicated in the notice, the Employee's breach will be deemed cured
and his employment shall not be terminated; provided, however, that if the
nature of any material performance failure by the Employee described in the
notice are such that more than thirty (30) days are reasonably required to
correct such failure, then the Employee's breach will be deemed cured and the
Employee's employment shall not be terminated if the Employee substantially
commences to correct such performance failure within (30) days of receipt of the
notice and thereafter diligently prosecutes such collective actions. Otherwise,
the Employer shall have the right to terminate the Employee's employment and its
obligations under this Agreement at the end of the thirty (30) day period
following receipt of such notice by the Employee.
<PAGE> 84
5.4 Governmental Restrictions on Continued Operations. The
Employee understands that the conduct of the Employer's business and that of its
banking subsidiary, Sterling Bank, is, and during the term of this Agreement
shall be, subject to the laws, rules, regulations, permits and licenses of
various governmental bodies and agencies, including without limitation, the
Department of Financial Institutions, the Federal Deposit Insurance Corporation
and the Board of Governors of the Federal Reserve System. Notwithstanding
anything, to the contrary contained herein, if the commencement or continuation
of the Employer's business or that of Sterling Bank is, for any reason,
prohibited, prevented or substantially restricted by a court of law or any such
governmental body or agency, the Employer shall thereafter have the right to
terminate the employment of the Employee and its obligations under this
Agreement, at its sole option, by giving written notice of such termination to
the Employee, with no further liability on the part of the Employer other than
for any accrued but unpaid compensation to the Employee.
6. EMPLOYER'S AUTHORITY.To the extent not inconsistent with
other terms of this Agreement, the Employee agrees to observe and comply with
the reasonable rules and regulations of the Employer, as adopted by the Board,
respecting performance of his duties and to carry out and perform the reasonable
orders, directions and policies of the Employer as they may be, from time to
time, stated to him either orally or in writing.
7. EXPENSES AND FRINGE BENEFITS.
7.1 Automobile Allowances. The Employer and Employee agree
that the proper discharge of the duties of the Employee will require the
frequent use of an automobile. The Employer hereby agrees to provide the
Employee with the use of an automobile chosen jointly by the Employee and the
Employer, and suitable for use by an executive officer of a bank or bank holding
company. Such automobile shall be purchased or leased by the Employer and
provided to the Employee for his exclusive use and at the termination of the
Employment Period, the Employee shall have the right to purchase such automobile
from the Bank for its depreciated book value or have the Employer take steps to
transfer such lease to him as lessee or sublessee. In lieu of the right to the
use of an automobile as provided for in this paragraph, however, at the
Employee's option he may directly purchase or lease an automobile and the
Employer shall, during the Employment Period, pay to the Employee additional
compensation of $750.00 per month and pay or reimburse all reasonable expenses
incurred by the Employee in connection with the use and operation of such
automobile, including, but not limited to insurance, licensing, taxes and other
operating expenses.
7.2 Business Expenses. Subject to Section 7.3 below, the
Employer shall pay or reimburse all expenses reasonably incurred by the Employee
in discharge of the Employee's duties hereunder. Such expenses shall include,
without limitation, the following:
(a) Educational expenses incurred for the purpose of
maintaining or improving the Employee's skills;
(b) Expenses for travel, lodging, and related expenses in
connection with conventions or meetings, attendance at which is necessary or
appropriate in connection with the performance by the Employee of his duties
required hereunder;
<PAGE> 85
(c) Expenses for meals, entertainment and similar items
reasonably incurred by the Employee in connection with the business of the
Employer; and
(d) Such other expenses incurred by the Employee
reasonably related to the discharge by the Employee of his duties set forth
herein.
7.3 Expense Documentation. The Employer reserves the right to
require, as a condition of payment or reimbursement for any item pursuant to
Section 7.2, that the Employee furnish the Employer with reasonable written
evidence of such expense and documentation of the relationship of such item to
the business of the Employer or the duties of the Employee.
7.4 Fringe Benefits. The Employee shall be entitled to
participate in any group life and health insurance plans offered by the Employer
to its employees. Such participation shall be on the same basis as the majority
of the other employees participating in such plan. Also, if the Employer
implements any new benefit plan for its employees generally, the Employee will
be allowed to participate in such benefit plan on the same basis as the other
employees. In addition, the Employer will provide to the Employee a $250,000
whole life insurance policy, payable as designated by the Employee. The premiums
on such policy will be paid by the Employer. Such policy shall be the property
of the Employee.
7.5 Club Fees. The Employer and the Employee agree that it is
necessary and proper for the Employee to maintain membership in the Wilshire
Country Club, and that such membership is in the best interests of the Employer
and in furtherance of the Employee's obligations hereunder. The Employer agrees
to pay or reimburse the initial and ongoing costs of an equity membership. Such
equity membership shall be held in the name of the Employee during the term of
the Employment Period and, upon the termination thereof for any reason, the
Employee shall have the right to retain such equity membership upon payment to
the Employer of an amount equal to the book value of the membership as of the
date hereof, which is $9,500.
8. ADDITIONAL RIGHTS OF THE EMPLOYEE.
8.1 Termination Payment. As an additional incentive to the
Employee, it is agreed that upon any termination, prior to January 2, 1999, of
this Agreement or the Employment Period for any reason other than as set forth
in Sections 5.1 (b), 5.1 (e), 5.1 (f), 5.1 (g) or the Employee's voluntary
termination, the Employee shall receive a lump sum payment equal to four (4)
months of his then current salary, plus any accrued and unpaid compensation.
9. CONFIDENTIAL DISCLOSURE. Except in the proper performance
of the Employee's duties pursuant to this Agreement, the Employee agrees that he
will not for any reason or at any time during or subsequent to the Employment
Period disclose to any person any secret, confidential or proprietary
information relating to the products or services of the Employer or any trade
secrets of the Employer. The Employee agrees that the remedy at law for any
breach of the foregoing will be inadequate, and that the Employer shall be
entitled to injunctive relief for any such breach. The obligations of the
Employee pursuant to this Section 9 shall survive a termination of the
Employment Period and this Agreement.
<PAGE> 86
10. MISCELLANEOUS.
10.1 Assignability of Agreement. The provisions of this
Agreement shall inure to the benefit of the parties hereto, and their respective
permitted heirs, legal representatives, successors and assigns. The obligations
of the Employee under this Agreement shall be personal and not delegable by him
in any manner whatsoever.
10.2 Notices. Any notice, request, instruction or other
document to be given hereunder by either party hereto to the other shall be in
writing and delivered personally or sent by certified or registered mail,
postage prepaid, addressed as follows:
If to the Employee:
Mr. Allan Dalshaug
3346 Deer Creek Lane
Glendale, California 91208
If to the Employer:
Corporate Secretary
Sterling West Bancorp
3287 Wilshire Boulevard
Los Angeles, California 90010
Any notice so given shall be deemed received when delivered
personally, or (if mailed) when dispatched. Any party may change the address to
which notices are to be sent by giving written notice of such change of address
to the other party in the manner herein provided for giving of notice.
10.3 Waiver. No waiver of any breach of any warranty,
representation, covenant or other term or provision of this Agreement shall be
deemed to be a waiver of any preceding or succeeding breach of same or any
warranty, representation, covenant, term or provision. No extension of the time
for performance of any obligation or other act shall be deemed to be an
extension of the time for the performance of any other obligation or any other
act.
10.4 Amendment to Agreement. This Agreement contains the
entire agreement between the parties hereto with respect to the subject matter
contemplated herein, and may not be amended, supplemented or discharged except
by an instrument writing signed by both parties hereto. 10.5 Dispute/Attorney's
Fees. Should any dispute arise concerning the terms or the interpretation of
this Agreement, the prevailing party shall be entitled to and be awarded
reasonable attorney's fees and costs, in addition to any other relief to which
it may be entitled.
10.5 Dispute/Attorney's Fees. Should any dispute arise
concerning the terms or the interpretation of this Agreement, the prevailing
party shall be entitled to and be awarded reasonable attorney's fees and costs,
in addition to any other relief to which it may be entitled.
<PAGE> 87
10.6 Time of the Essence. Time is of the essence of each
provision of this Agreement in which time is an element.
10.7 Arbitration. Any controversy or claim arising out of or
relating to this Agreement will, at the written request of any party, be
determined by binding arbitration under the auspices and rules then in effect of
the American Arbitration Association (the "Association") in Los Angeles,
California, as the same may be modified by the statues of California then in
effect. Such arbitration shall be conducted by a single arbitrator if the
parties shall agree upon one, or else by one arbitrator appointed by each party
and a third arbitrator appointed by the two arbitrators. In case of any failure
of a party to make any such appointment within two (2) weeks after written
notice of the controversy, such appointment shall be made by the Association.
All arbitration proceedings shall be held in Los Angeles, California, and each
party agrees to comply in all respects with any award made in such proceeding
and to the entry of a judgment in any jurisdiction of any award rendered in such
proceeding. All costs and expenses of the arbitration (including costs of
preparation and reasonable attorney's fees) of the party prevailing in such
arbitration shall be borne by the losing party to such arbitration, unless
directed otherwise by the arbitrators. Notwithstanding any other provision of
this paragraph, however, no party may make a request for arbitration hereunder
with respect to any matter, at any time following the expiration of (30) days
after notice of filing of a legal action with respect to such matter in a court
of competent jurisdiction.
10.8 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original and all of which
taken together shall constitute one instrument.
IN WITNESS WHEREOF, the parties have duly executed this Agreement
as of the date first above written.
STERLING WEST BANCORP ALLAN E. DALSHAUG
"Employer" "Employee"
By: /s/ Audrey J. Fimpler By: /s/ Allan E. Dalshaug
Name: Audrey J. Fimpler
Title: Chairperson, Compensation Committee
<PAGE> 88
EXHIBIT 10.21.3
AGREEMENT
THIS AGREEMENT is made and entered into as of the 1ST DAY OF
JANUARY 1998 by and between STERLING BANK, a California corporation, hereinafter
referred to as "Employer", and JOSEPH CARONA, hereinafter referred to as
"Employee" and replaces the agreement dated January 2, 1997.
The parties contract with reference to the following facts:
A. Employer desires to employ Employee as its
President and Employee desires to accept employment with Employer in such
capacity.
B. The parties are willing to enter into an agreement
providing for such employment upon the terms and conditions hereinafter set
forth.
1. EMPLOYMENT. Employer hereby agrees to employ
and does hereby employ Employee, and Employee agrees to accept and hereby
accepts employment by Employer, on the terms and subject to the conditions set
forth in this Agreement.
2. COMPENSATION.
2.1 Salary. Employer agrees to pay to Employee
salary at the rate of One Hundred and Forty Thousand, Two Hundred and Eighty
dollars ($140,280.00). Increases in the salary rate shall be at the discretion
of the Board of Directors of Employer. Salary called for by this Agreement shall
be prorated and paid out periodically in accordance with the Employer's normal
payroll procedures with respect to executive officers.
2.2 Bonus. Upon completion of each fiscal
year of Employer, Employer shall consider a bonus for Employee based upon
Employee's performance during the completed fiscal year and the overall
financial performance of Employer. Employer may award Employee bonuses based
upon such consideration, and intends to do so. However, Employer shall not be
obligated in any way whatsoever to grant such bonuses which shall be granted, if
at all, at the sole discretion of Employer.
<PAGE> 89
3. DUTIES, TIME AND EFFORTS. Employee shall serve as
President of Employer and as such, shall report to the Chairman of the Board of
Directors, and his duties shall include generally, but without limitation,
authority and responsibility for the whole and overall supervision of the
banking aspects of Employer's business, the managing of the portfolio of loans
and deposit liabilities and the procurement of new business for Sterling Bank;
and he shall also undertake such other reasonable duties of a similar managerial
nature as the Chairman may at any time or from time to time, direct him to
perform including, but not limited to, providing services to subsidiaries and/or
affiliates of Employer without additional compensation. Employee shall devote
his full productive time, energies and abilities to the proper and efficient
performance of Employer's business pursuant to the employment hereunder.
Employee shall at all times during the term hereof be furnished with such
office, stenographic and other necessary secretarial assistance, and such other
facilities, amenities and services as are suitable to Employee's duties
hereunder. Unless otherwise agreed to by Employer, the Employee's offices shall
be maintained at the premises of the principal office of the Employer in Los
Angeles, California; provided, however, that in connection with the performance
of his duties and responsibilities, the Employee acknowledges that he may be
required to undertake reasonable business traveling. Employee may not without
the prior express authorization of Employer's Board of Directors directly or
indirectly during the term of this Agreement engage in any activity competitive
with the business of Employer, whether acting alone, as an owner, shareholder,
partner, or consultant, as an officer, director, or employee of any other
corporation, or otherwise; provided, however, that nothing herein contained
shall prevent employee from purchasing and/or holding less than one percent (1%)
of the issued and outstanding stock of a publicly-held corporation.
4. VACATION. Employee shall be entitled to a
vacation of three (3) weeks during each twelve (12) month period of the term of
this Agreement. The date or dates of said vacation shall be determined by
Employee and the Chairman of Employer. If for any reason Employee does not take
his full three (3) weeks of vacation as provided above, he may carry over a
maximum of one (1) week into the following year, but if he does not use the
carried over vacation week in that year it shall expire. Therefore, under no
circumstances regardless of employees failure to take vacations, would he be
entitled to more than four (4) weeks vacation during any twelve (12) month
period.
5 . TERM
5.1 The term of employment shall commence upon
the date of this Agreement and terminate on the 1st day of January 1999 unless
sooner terminated pursuant to Section 5.4 below, or upon the happening of any of
the following events (the "Employment Period"):
(a) Whenever Employer and Employee shall
otherwise mutually agree to termination;
(b) Conviction of Employee for any crime
involving a dishonest act or involving any behavior not expected of an executive
of a bank which would make the continuance of his employment detrimental to
Employer;
(c) Death of Employee;
<PAGE> 90
(d) Disability of Employee not arising out of
an injury sustained while on Employer's business extending beyond ninety (90)
consecutive days or totaling more than ninety (90) days in any period of three
hundred sixty-five (365) days (not limited to any calendar or fiscal year);
(e) Commission of a dishonest act by the
Employee in the course of his employment;
(f) For "good cause" as defined in Section
5.2 below and pursuant thereto;
(g) At Employee's sole option, exercisable at
any time upon ninety (90) days written notice; and
(h) At Employer's sole option, exercisable at
any time upon thirty (30) days written notice.
5.2 Termination for Good Cause After Notice and
Failure To Cure. Employer may at any time during the term of this
Agreement terminate this Agreement for good cause by written notice to the
Employee by complying with the notice requirements and restriction in Section
5.3. Good cause shall include, for purposes of illustration, but shall not be
limited to the following reasons:
(a) Persistent unwillingness or inability to
perform his duties.
(b) Persistent malfeasance, misfeasance of
nonfeasance in connection with the performance of his duties; such conduct to be
determined solely by the Employer.
(c) Willful and intentional acts having the
effect of injuring the reputation, business or business relationships of
Employer.
(d) Breach of any material provision of this
Agreement.
<PAGE> 91
5.3 Notice Requirements and Restrictions.
Provided, however, and by restriction to the right of Employer set forth in
Section 5.2, in the event Employer contends that Employee is not performing the
services required by this Agreement or that it has good cause to terminate
Employee pursuant to Section 5.2 of this Agreement, Employer shall provide
Employee with a written notice specifying in reasonable detail the services or
matters which it contends Employee has not been adequately performing and why
Employer has good cause to terminate this Agreement and what Employee should do
to adequately perform his obligations hereunder. If Employee performs the
required services within seven (7) days of receipt of the notice or immediately
modifies his performance to correct the matters complained of, Employee's breach
will be deemed cured and he shall not be terminated; provided, however, if the
nature of the service not performed by the Employee or the matters complained of
are such that more than seven (7) days are reasonably required to perform the
required service or to correct such matters, then Employee's breach will be
deemed cured if Employee commences to perform such services or to correct such
matters within said seven (7) day period and thereafter diligently prosecutes
such performance or correction to completion. If in the opinion of the Employer
the Employee does not perform the required services or modify his performance to
correct the matters complained of within said seven (7) day period, Employer
shall have the right by written notice to terminate this Agreement at the end of
said seven (7) day period.
As an additional incentive to the Employee, it is agreed that upon any
termination, prior to January 1, 1999, of this Agreement or the Employment
Period for any reason other than as set forth in Sections 5.1 (b), 5.1 (e) , 5.1
(f) or 5.1 (g), the Employee shall receive a lump sum payment equal to three (3)
months of his then current salary, plus any accrued and unpaid compensation.
5.4 Termination of Employment Without Cause
Because of Governmental Restrictions on Continued Operations of Employer or
Bank.
The Employee understands that the conduct of Employer's business and the
banking business is, and during the term of this Agreement will be, subject to
regulation by law and by rules, regulations, permits and licenses of various
governmental bodies. If the continuation of Employer's business or the
continuation of the banking business by Sterling Bank is for any reason whatever
prohibited, prevented, or substantially restricted by a court of law or such
governmental bodies, Employer shall thenceforward have the right, at its option,
to terminate this Agreement by giving written notice of such termination without
liability other than for such compensation as shall then have accrued but not
yet been paid, notwithstanding Section 5.3.
6. EMPLOYERS AUTHORITY. To the extent that the
following is not inconsistent with the other provisions of this Agreement,
Employee agrees to observe and comply with the rules and regulations of Employer
as adopted by Employer's Board of Directors respecting performance of his duties
and to carry out and perform orders, directions and policies of Employer as they
may be, from time to time, stated to him either orally or in writing.
<PAGE> 92
7. ADDITIONAL RIGHTS OF EMPLOYEE
Upon a "Change of the Control" of the Employer, the Employee shall be entitled
to receive a lump sum payment equal to thirty-five thousand and seventy dollars
($35,070) (the "Change in Control Payment"). For purposes of this Section,
"Change of Control" shall mean (i) a merger or consolidation where the Employer
is not the surviving entity (other than a reorganization not involving a change
in ownership); (ii) a merger or consolidation where the Employer is the
surviving entity but more than fifty percent (50%) of the outstanding shares of
the Employer are exchanged for cash or stock of another unaffiliated entity;
(iii) a transfer to another entity of all or substantially all of the assets of
the Employer (other than a reorganization not involving a change in ownership);
or (iv) an acquisition by a person (which term includes an entity or an
individual) or person acting as a group of more than fifty percent (50%) of the
then outstanding shares of the Employer that are held by a person or group of
persons (whether or not acting in concert) not the holder of more than fifty
percent (50%) of the shares of the Employer on the Effective Date. For purposes
of this Section, "Employer" shall also be defined to include Sterling West
Bancorp, parent corporation of the Employer. In the event Employee is terminated
for any reason prior to a Change of Control, Employee shall not be entitled to
any benefits under this Section 7.
8. EXPENSES AND FRINGE BENEFITS.
8.1 Employer and Employee agree that Proper
discharge of the duties imposed upon Employee shall require the frequent use of
an automobile. The Corporation hereby agrees that it shall provide Employee with
a standard mid-size automobile, chosen by the Employee and Employer and suitable
for use by a President of an institution such as Employer. Such automobile shall
be purchased or leased by Employer and provided to Employee for his exclusive
use, or at the option of Employee, Employee shall purchase or lease an
automobile and the reasonable cost thereof shall be reimbursed by Employer for
so long as he is employed hereunder. Notwithstanding the foregoing, Employer
shall not be required to expend more dm Five Hundred Dollars ($500.00) per month
in connection with such purchase, lease or reimbursement inclusive of insurance,
license, taxes and operating expenses. Employee may, at his option, receive the
aforementioned sum of $500.00 as an automobile allowance, in lieu of being
provided with a bank owned automobile.
8.2 Employer shall pay or reimburse all expenses
reasonably incurred by Employee in discharge of Employee's duties hereunder.
Such expenses shall include, without limitation, the following:
(a) Education expenses incurred for the
purpose of maintaining or improving Employee's skills;
(b) Expenses for travel, lodging, and related
expenses in connection with conventions or meetings, attendance at which is
necessary or appropriate in connection with the performance by Employee of his
duties required hereunder;
(c) Expenses for meals, entertainment and
similar items reasonably incurred by Employee in connection with the business of
the Employer; and
<PAGE> 93
(d) Monthly dues for employees membership in
the Jonathan Club.
(e) Such other expenses incurred by the
Employee reasonably related to the discharge by Employee of his duties as set
forth herein.
8.3 Employer shall require, as a condition of
payment or reimbursement for any item pursuant to Section 7.2, that Employee
furnish Employer with reasonable documentation evidencing that the expense has
been incurred and the relationship of such item to the business of Employer or
the duties of Employee.
8.4 Notwithstanding any provisions herein to the
contrary, Employer shall provide to Employee all other Employee fringe benefits
which are generally provided for or made available to the employees of Employer.
Without limiting the generality of the preceding sentence, Employee shall be
entitled to participate in any group life and health insurance plans, any
qualified or non-qualified pension or profit sharing plan adopted or maintained
by the Employer and participation in Employer's Stock Ownership Plan (ESOP), if
continued. Such participation shall be on the same basis as the majority of
participants in such plan. In addition, Employer will provide a $100,000 term
life insurance policy payable as designated by Employee. The premiums on such
policy will be paid by the Employer and will aggregate approximately $1,200 per
year.
9. CONFIDENTIAL, DISCLOSURE. Except to the extent that
the proper performance of the Employee's duties pursuant to this Agreement may
require disclosure, Employee agrees that he will not for any reason or at any
time during or subsequent to the term of this Agreement disclose to any person
any secret of confidential information relating to the services of Employer or
any trade secrets of Employer or any other secret or confidential information
relating to Employer or the products or services of Employer. Employee agrees
that the remedy at law for any breach of the foregoing will be inadequate, and
that Employer shall be entitled to injunctive relief for any such breach.
10. MISCELLANEOUS
10.1 Assignability of Agreement. The provisions
of this agreement shall inure to the benefit of the Parties hereto, and their
respective, permitted heirs, legal representatives, successors and assigns. The
obligations of Employee under this Agreement shall be personal and not delegable
by him in any manner whatsoever.
<PAGE> 94
10.2 Notices. Any notice, request, instruction or
other document to be given hereunder by either party hereto to the other shall
be in writing and delivered personally or sent by certified or registered mail,
postage prepaid, and if mailed to any addressee in a state other than the state
of mailing, by air mail, addressed as follows:
IF TO EMPLOYEE: Joseph Carona
210 Hacienda Drive
Arcadia, CA 91006
IF TO EMPLOYER: Allan E. Dalshaug, Chairman
Sterling Bank
3287 Wilshire Blvd.
Los Angeles, California 90010
Any notice so given shall be deemed received when delivered personally, or (if
mailed) when dispatched. Any party may change the address to which notices are
to be sent by giving written notice of such change of address to the other party
in the manner herein provided for giving notice.
10.3 Waiver. No waiver of any breach of any
warranty, representation, covenant or other term or provision of this Agreement
shall be deemed to be a waiver of any preceding or succeeding breach of the same
or any other warranty, representation, covenant, term or provision. No extension
of the time for performance of any obligation or other act shall be deemed to be
an extension of the time for the performance of any other obligation or any
other act.
10.4 Amendment to Agreement. This Agreement
contains the entire agreement between the Parties hereto with respect to the
transactions contemplated herein, and may not be amended, supplemented or
discharged except by an instrument in writing signed by both Parties hereto.
10.5 Disputes/Attorneys Fees. Should any dispute
arise concerning the terms or the interpretations of this Agreement, the
prevailing Party shall be entitled to and be awarded reasonable attorneys' fees
and costs in addition to any other relief to which it may be entitled.
10.6 Time of the Essence. Time is of the essence
of each provision of this Agreement in which time is an element.
<PAGE> 95
10.7 Arbitration. The parties agree if any
controversy or claim shall arise out of this Agreement or the breach hereof and
either party shall request that the matter be settled by arbitration. The matter
shall be settled exclusively by arbitration in accordance with the rules then in
effect of the American Arbitration Association in the city of Los Angeles,
California as the same may be modified by the statutes of California then in
effect, by a single arbitrator, if the parties shall agree upon one, or by one
arbitrator appointed by each party and a third arbitrator appointed by the other
arbitrators. In case of any failure of a party to make an appointment referred
to above within two (2) weeks after written notice of controversy, such
appointment shall be made by the Association. All arbitration proceedings shall
be held in the City of Los Angeles, California, and each party agrees to comply
in all respects with any award made in such proceeding and to the entry of a
judgment in any jurisdiction upon any award rendered in such Proceeding. All
costs and expenses of arbitration (including costs of preparation therefor and
reasonable attorneys' fees incurred in connection therewith) of the party
prevailing in such arbitration shall be done by the losing party to such
arbitration, unless otherwise directed by the arbitrators. Notwithstanding any
provision of this section herein set forth no party may make a request for
arbitration hereunder with respect to any matter at any time following the
expiration of thirty (30) days after notice of the filing of a legal action with
respect to such matters in a court of competent jurisdiction.
IN WITNESS WHEREOF, the parties have duly executed this Agreement effective as
of JANUARY 1,1998.
STERLING BANK JOSEPH C. CARONA
"Employer" "Employee"
By: /s/ Audrey J. Fimpler BY: /s/ Joseph C. Carona
Name: Audrey J. Fimpler
Title: Chairperson, Compensation Committee
<PAGE> 1
EXHIBIT 10.32
STERLING WEST BANCORP
FORM OF PROMISSORY NOTE
Principal __________ Los Angeles, California June 20, 1997. For the value
received, the undersigned hereby promises to pay to _____________ at the
following address: 3287 Wilshire Blvd., Los Angeles, CA 90010 or at such other
address as the holder may specify in writing, the principal sum of __________
plus interest as provided below.
Interest only shall be payable monthly commencing July 1, 1997 and continuing
on the 1st day of each month thereafter, at the initial rate of 10% percent per
annum, computed on the basis of a three hundred sixty (360) day year and actual
days elapsed from date hereof until paid in full. Principal shall be payable on
September 18, 1997, together with all accrued and unpaid interest. Principal
and interest is payable in lawful money of the United States of America. The
maker and endorser of the note hereby waive diligence, demand, presentment,
protest and notice. The rate of this note is a variable Interest Rate.
The interest rate may increase or decrease depending upon subsequent increases
or decrease in this loan's interest rate which is 1.5% per annum in excess of
Bank of America's ("Bank's") prime rate in effect from time to time. Any change
in the Bank's prime rate will be effective on this loan on the same day and will
increase or decrease the scheduled payments.
The unpaid balance of this obligation at any time shall be the total amounts
advanced by the holder hereof, less the amount of payments made hereon by or
for the undersigned. This note shall evidence all such advances regardless of
whether the unpaid balance shall at any time be reduced to zero.
At maturity this note will renew for an additional ninety days automatically,
subject to renewal for a maximum maturity of up to one year, unless change is
requested by the note holder.
STERLING WEST BANCORP
By /s/ JOSEPH C. CARONA
---------------------------
Joseph C. Carona
Chief Financial Officer
THIS IS NOT AN OBLIGATION OF STERLING BANK
THIS IS NOT A DEPOSIT INSURED BY THE F.D.I.C.
<PAGE> 1
EXHIBIT 23.1
[KPMG PEAT MARWICK LLP LETTERHEAD]
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Sterling West Bancorp
We consent to incorporation by reference in the registration statement (No.
2-77211) on Form S-8 of Sterling West Bancorp of our report dated March 24,
1998, relating to the consolidated balance sheets of Sterling West Bancorp and
subsidiaries as of December 31, 1997 and 1996 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1997, which report appears in
the December 31, 1997 Annual Report on Form 10-K of Sterling West Bancorp.
/s/ KPMG PEAT MARWICK LLP
Los Angeles, California
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM STERLING
WEST BANCORP AND SUBSIDIARIES' CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 6,836
<INT-BEARING-DEPOSITS> 99
<FED-FUNDS-SOLD> 15,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 10,636
<INVESTMENTS-MARKET> 10,712
<LOANS> 65,889
<ALLOWANCE> 1,072
<TOTAL-ASSETS> 101,250
<DEPOSITS> 94,074
<SHORT-TERM> 400
<LIABILITIES-OTHER> 390
<LONG-TERM> 0
0
0
<COMMON> 8,697
<OTHER-SE> (2,311)
<TOTAL-LIABILITIES-AND-EQUITY> 101,250
<INTEREST-LOAN> 6,958
<INTEREST-INVEST> 1,463
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8,421
<INTEREST-DEPOSIT> 2,502
<INTEREST-EXPENSE> 2,540
<INTEREST-INCOME-NET> 5,881
<LOAN-LOSSES> 1,242
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,353
<INCOME-PRETAX> (572)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (886)
<EPS-PRIMARY> (0.52)
<EPS-DILUTED> (0.52)
<YIELD-ACTUAL> 6.49
<LOANS-NON> 781
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,260
<CHARGE-OFFS> 1,599
<RECOVERIES> 169
<ALLOWANCE-CLOSE> 1,072
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (STERLING
WEST BANCORP AND SUBSIDIARIES) CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1997 JUN-30-1997 MAR-31-1997
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997
<CASH> 5,847 7,413 4,592
<INT-BEARING-DEPOSITS> 99 99 197
<FED-FUNDS-SOLD> 12,000 16,130 8,953
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 0 0 0
<INVESTMENTS-CARRYING> 11,293 11,741 12,044
<INVESTMENTS-MARKET> 11,281 11,713 11,911
<LOANS> 68,775 62,684 68,951
<ALLOWANCE> 1,668 1,476 1,365
<TOTAL-ASSETS> 101,230 102,772 98,539
<DEPOSITS> 92,794 94,377 90,026
<SHORT-TERM> 800 900 0
<LIABILITIES-OTHER> 908 874 1,193
<LONG-TERM> 0 0 0
0 0 0
0 0 0
<COMMON> 8,686 8,686 8,686
<OTHER-SE> (1,958) (2,065) (1,366)
<TOTAL-LIABILITIES-AND-EQUITY> 101,230 102,772 98,539
<INTEREST-LOAN> 5,196 3,428 1,720
<INTEREST-INVEST> 1,082 696 324
<INTEREST-OTHER> 0 0 0
<INTEREST-TOTAL> 6,278 4,124 2,044
<INTEREST-DEPOSIT> 1,882 1,241 604
<INTEREST-EXPENSE> 1,907 1,244 604
<INTEREST-INCOME-NET> 4,371 2,880 1,440
<LOAN-LOSSES> 1,227 1,039 389
<SECURITIES-GAINS> 0 0 0
<EXPENSE-OTHER> 4,532 3,098 1,426
<INCOME-PRETAX> (531) (638) 61
<INCOME-PRE-EXTRAORDINARY> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (533) (640) 59
<EPS-PRIMARY> (0.31) (0.37) 0.03
<EPS-DILUTED> (0.31) (0.37) 0.03
<YIELD-ACTUAL> 6.44 6.46 6.49
<LOANS-NON> 1,260 1,456 3,839
<LOANS-PAST> 0 13 0
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 1,260 1,260 1,260
<CHARGE-OFFS> 957 817 282
<RECOVERIES> 0 0 0
<ALLOWANCE-CLOSE> 1,668 1,476 1,365
<ALLOWANCE-DOMESTIC> 0 0 0
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (STERLING
WEST BANCORP AND SUBSIDIARIES) CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,929
<INT-BEARING-DEPOSITS> 197
<FED-FUNDS-SOLD> 18,393
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 7,027
<INVESTMENTS-MARKET> 7,007
<LOANS> 68,889
<ALLOWANCE> 1,260
<TOTAL-ASSETS> 104,561
<DEPOSITS> 96,186
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,114
<LONG-TERM> 0
0
0
<COMMON> 8,686
<OTHER-SE> (1,425)
<TOTAL-LIABILITIES-AND-EQUITY> 104,561
<INTEREST-LOAN> 7,552
<INTEREST-INVEST> 1,238
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8,790
<INTEREST-DEPOSIT> 2,485
<INTEREST-EXPENSE> 2,529
<INTEREST-INCOME-NET> 6,261
<LOAN-LOSSES> 886
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,658
<INCOME-PRETAX> 346
<INCOME-PRE-EXTRAORDINARY> 346
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 343
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
<YIELD-ACTUAL> 6.71
<LOANS-NON> 1,424
<LOANS-PAST> 210
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,510
<CHARGE-OFFS> 1,159
<RECOVERIES> 23
<ALLOWANCE-CLOSE> 1,260
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (STERLING
WEST BANCORP AND SUBSIDIARIES) CONSOLIDATED FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1996 JUN-30-1996 MAR-31-1996
<PERIOD-END> SEP-30-1996 JUN-30-1996 MAR-31-1996
<CASH> 7,158 5,662 5,976
<INT-BEARING-DEPOSITS> 99 0 198
<FED-FUNDS-SOLD> 12,096 15,481 8,230
<TRADING-ASSETS> 590 881 0
<INVESTMENTS-HELD-FOR-SALE> 0 0 0
<INVESTMENTS-CARRYING> 6,140 7,147 7,604
<INVESTMENTS-MARKET> 6,066 7,032 7,575
<LOANS> 69,032 73,307 70,970
<ALLOWANCE> 1,285 1,519 1,397
<TOTAL-ASSETS> 98,646 105,818 98,783
<DEPOSITS> 89,306 96,504 89,283
<SHORT-TERM> 0 367 398
<LIABILITIES-OTHER> 2,107 1,754 2,148
<LONG-TERM> 0 0 0
0 0 0
0 0 0
<COMMON> 8,686 8,686 8,686
<OTHER-SE> (1,453) (1,493) (1,732)
<TOTAL-LIABILITIES-AND-EQUITY> 98,646 105,818 98,783
<INTEREST-LOAN> 5,787 3,813 1,964
<INTEREST-INVEST> 574 378 175
<INTEREST-OTHER> 346 236 115
<INTEREST-TOTAL> 6,707 4,427 2,254
<INTEREST-DEPOSIT> 1,876 1,272 631
<INTEREST-EXPENSE> 1,920 1,308 657
<INTEREST-INCOME-NET> 4,787 3,119 1,597
<LOAN-LOSSES> 265 181 61
<SECURITIES-GAINS> 0 0 0
<EXPENSE-OTHER> 4,989 3,380 1,666
<INCOME-PRETAX> 556 485 66
<INCOME-PRE-EXTRAORDINARY> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 315 275 36
<EPS-PRIMARY> 0.18 0.16 0.02
<EPS-DILUTED> 0.18 0.16 0.02
<YIELD-ACTUAL> 7.36 6.55 7.46
<LOANS-NON> 1,179 2,217 1,629
<LOANS-PAST> 0 0 195
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 1,510 1,510 1,510
<CHARGE-OFFS> 510 194 195
<RECOVERIES> 22 22 22
<ALLOWANCE-CLOSE> 1,285 1,519 1,397
<ALLOWANCE-DOMESTIC> 0 0 0
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
</TABLE>
